While a few high-yield bank accounts give rates that are much higher than this, bank deposits won’t earn you much in terms of interest. Fortunately, it is not difficult to make higher returns without taking too much unnecessary risk.
Here are seven low-risk investments to make your money grow safely.
These seven investments will help improve your returns faster than the typical savings account. Bear in mind, however, that although these are low-risk investments, they are not risk-free investments. In comparison to bank accounts, these items are not FDIC insured—you can still lose money.
That said, you might be willing to take a little extra risk in exchange for higher return rates on products that still offer high liquidity and ease of access. To preserve good financial health, make sure you have a fully loaded emergency fund before spending any extra cash that you might need in a pinch.
Treasury bills, Treasury bills and Treasury bonds
If you want to gain a marginally better interest rate than a savings account without a lot of extra risk, the first and best choice is government bonds, which give interest rates of 0.09 per cent for one month, up to 1.23 per cent for 30 years (as of mid-August 2020).
Bonds issued by the U.S. Treasury are backed by the absolute confidence and credit of the U.S. government, which carries a lot of weight. Historically, the U.S. has always paid off its debts. This makes government debt reliable and easier to purchase and sell on secondary markets if you need access to your cash until the debt has matured.
This stability, however, means that bonds could have lower yields than you would have received from bonds where the debt was less likely to be repaid, as is the case for corporate bonds.
If you are able to consider a slightly higher chance of higher returns, high-grade corporate debt might be a good choice. These bonds—issued by established, high-performing companies—usually give higher returns than treasury or money market accounts. As of June 2020, 10-year high-quality bonds pay an average interest rate of 2.36%, according to the St. Louis Federal Reserve.
Although high-grade corporate bonds are relatively secure, you can still lose money investing in them if you:
Interest rates are going up. Since interest rate bonds are usually locked in for a certain period of time, your money won’t receive the higher rate. If you need to sell your bonds, you will also have to sell them for less than you would have paid if the average interest rate has increased. If you keep your bonds until maturity, your face value plus interest will be refunded.
The issuer is going to split. While investment-grade bonds are usually considered reasonably safe assets, they are still not as secure as the money kept in bank accounts. That’s why it’s crucial to concentrate on debts provided by highly rated companies that are most likely to pay you back. Less highly rated companies can offer higher interest rates, but they are also more likely to lose money.
Cash Market Mutual Funds
Money market mutual funds invest in overnight commercial paper and other short-term securities. Even the strongest money market funds prefer to deliver next-to-no returns. Unlike Treasury products and corporate bonds, however, money market funds give investors total liquidity: they have almost no volatility, and you can take your money out at any time.
It is also worth remembering that many banks also sell mutual funds to the money market. If you don’t have or don’t want to set up a brokerage account, you will still be able to invest money market funds from your bank.
Fixed annuities are a form of annuity contract that requires investors to pay a lump sum in advance in return for a number of payments over time. Functionally, fixed annuities operate a lot like savings certificates: you choose to lock up your access to your money for a fixed period of time, and you get higher than the average interest rate in return.
As of mid-August 2020, fixed annuity interest rates range from around 1.0 per cent to 3.60 per cent, according to Blueprint Profits, a fixed annuity marketplace. Bear in mind, however, that higher interest rates also come from less well-respected insurers, which means that they are more likely to default on payment.
Also note that, like CDs, you can incur penalties if you need to have access to all your money before the maturity date of your fixed annuity. However, you will usually have a penalty-free access to a percentage of your money per month.
Preferred stock functions like a mix of stocks and bonds: it provides some of the opportunity for appreciation you get from common stocks, while also offering stable dividend payments for bonds. In fact, preferred shares also offer higher dividend payments than corporate bonds because, unlike bonds, payment is not always assured.
Since 1900, preferred stocks have yielded an average annual return of more than 7%, much of which comes from dividend payments.
In addition to dividends, you will see your investment expand through a buyback. Recently, many businesses have been buying back preferred shares, usually at a slightly higher price than they were sold for, since preferred shares pay higher dividends—and therefore cost firms more—than corporate debt.
Popular inventories that pay dividends
Apart from preferred stocks, some common stocks are also relatively safe choices for those with higher yields in this low-interest-rate setting. Among these are real estate investment trusts (REITs) and utilities, which are traditionally known as safer, less volatile and more stable in their dividend payments.
As of January 2020, the REIT dividends paid 3.93 per cent on average and the utilities dividends paid 3.11 per cent on average, according to data analyzed by NYU’s Stern School of Business.
Irrespective of the industry in which you invest, when selecting popular stocks, it is better to stick with big, solid names that have been around for decades and pay regular, reliable dividends—not growth stocks that live and die from investor excitement.
Bear in mind, however, that payments of common stock dividends are not guaranteed and, like all securities, you can lose money if you invest in them.
The Index Funds
Specific shares, such as common and preferred stocks or bonds, are not diversified. You can only purchase shares or bonds from one or two companies, making them potentially very risky. What happens if the businesses go under?
Index funds allow you to invest in hundreds or thousands of individual shares and bonds. This dramatically lowers the risk you take when you invest while also providing higher interest or dividend rates. Diversified higher-rate funds include PIMCO’s BOND or Vanguard’s BND or VDADX (Dividend Appreciation) funds.
The Lower Line
You should still have cash deposits in a liquid savings account, which you can access easily if necessary. But for the money you need to be a little liquid, but aiming to make a higher return, you have choices. Money market funds, annuities, government and high-grade corporate debt are some of the best low-risk, higher-yield ways to increase your money even though interest rates are low.