7 Best Low-Risks Decent Return Investments for 2017
March 28, 2017
Low-Risk, High-Return Investments
An investor’s ideal portfolio would be full of safe investments with high returns. However, safe investments typically do not have such returns, because they require risk. But that said, it’s not as if low-risk, high-return investments don’t exist; you just have to put in the work to find them.
Low-risk investments offer low volatility on the overall investment, which means the daily movements in the investment’s price won’t be a cause for concern. This is a big positive, because it means the preservation of the investment’s capital, with expectations of growth.
Below is a list of low-risk investments that could fit in your investment portfolio. I will also answer various questions you may have, such as, “Is investing in bonds safe?,” “What are some low-risk investments?,” and, “Are Treasury bills a safe investment?”
Examples of Low-Risk Investments
| Investment Type | How a Return Will Be Received as an Investor |
| Dividend-Paying Stocks | Dividend and capital gains |
| Bonds | Interest payment and capital gains |
| Preferred Shares | Dividend, and capital gain |
| Exchange-Traded Funds (ETFs) | Dividend, return of capital, interest and capital gain |
| Annuities | Cash payment |
| Real Estate Investment Trusts (REITs) | Dividend, return of capital, interest and capital gain |
| Certificates of Deposit (CDs) | Interest payment |
1. Dividend-Paying Stocks
The stock market is known for satisfying the needs of many different type of investors. Whether you’re looking for a quick profit as a trader or only planning to invest in companies that have huge potential for double-digit annual returns, the stock market can fulfill your needs. These aforementioned investments sees a lot of volatility due to their high expected returns, associated with a high risk tolerance.
On the other end of the spectrum, there are investors looking to preserve their capital and grow their money as time passes. One way of achieving this is by owning dividend-paying stocks. This group of stocks tends to see much less volatility when compared to stocks that generate higher returns. However, note that there will still be market risk associated with the investment, so it could eventually generate high returns as well.
The longer the investment is held, the lower the risk. Also, by owning a dividend-paying stock, you will earn income no matter how the overall market is performing, as companies with a long track record of paying a steady dividend tend to see their earnings grow in both a booming and weak economy. Dividends also help with seeing capital appreciation of the stock price over time.
There is always the possibility of seeing the dividend grow if the earnings are steady, which should be reflected in the stock price. This will come to generate a high yield on cost on the investment.
2. Bonds
A bond is a debt investment, with the borrower being the company or government who issues it. You, as the investor, are the lender to the government entity or company.
A bond is similar to a loan, having a set interest rate and a deadline for paying the loan back. The term of the bond will depend on how long the borrower will need the funds for. The bond would be issued at what is known as “par value” (or face value), and the maturity value would be the same value. Most bonds tend to be issued at a par value of $100.00 or $1,000. The interest payment is known as the “coupon payment” and the yield is the “coupon rate.”
In the case of a government entity, it will be used for infrastructure spending, government programs, or as a shortfall with tax revenue for general cost.
The interest rate will depend upon the credit rating of the government in question. The U.S. government, for instance, has a very good credit rating, which results in a low coupon rate.
One type of bond that is issued by the U.S. government is Treasury bills. These are investments that guarantee the principal on the investment and offer a coupon payment to the investor.
Companies look to the debt markets because they don’t want to dilute their shareholders by issuing more equity. The debt would be used for business operations, possible acquisitions, or financial engineering. The credit rating for a company will depend on the strength of its balance sheet; the stronger the balance sheet, the lower the coupon rate on the bond.
Being a holder of a corporate bond would put you at the top of the list when compared to common or preferred shares. A company must pay bondholders before any equity holder of the shares receive a dividend, assuming there is one in place. This is what makes a bond investment low-risk.
There are opportunities to earn a high return on the bond investment by purchasing the bond below its par value; if held until maturity, the par value would be received. Since the bond would be purchased at a discount, a higher coupon rate would be received and capital gain would be accounted for.
If a bond is purchased at the par value, a high return could be earned by purchasing a high-yielding bond investment. This, again, would depend on the quality of the company’s credit rating.
3. Preferred Shares
Many investors tend to forget this investment product. Offered by companies, preferred shares represent a mix between common shares and bond investments. The expected return and risk parameters would be in the middle of that of both products.
Preferred shares do share the profits generated by the business, similar to a common stock that pays a dividend. If a company pays out a common share dividend, the preferred share dividend gets priority; if it were missed, then the common share dividend would not be paid out until the preferred share dividend was paid.
Investing in preferred shares has one major benefit over common stock: it is higher on the ownership list if a company happens to go bankrupt. If a business liquidated all of its assets and paid off the debt, then preferred share owners would receive a payment before common shareholders.
Preferred shares trade on the major trading exchanges. Even though the product trades like a stock does, there is a face value, just like a bond would have; this is the price that the shares are sold at to investors and can be redeemed by the company. Most have an issue and maturity value of $25.00 or $100.00 and the typical maturity period for preferred shares is five years, with a different period only in special cases.
There are times a issuer will have multiple preferred shares available for purchase on the markets. Also, there are times where the dividend yield is actually higher than the yield on the common stock.
4. Exchange-Traded Funds (ETF)
If you do not have the time to research specific investments, such as individual stocks or bond investments, an option is to consider owning exchange-traded funds (ETFs) that would cover of both these investment vehicles.
By owning an ETF which holds both dividend-paying stocks and bonds, it would generate a stream of income for you, the investor. And if you are looking to only own growth stocks that do not pay a dividend, an ETF is a great option.
Simply owning one ETF adds greatly to your portfolio’s diversification. Some ETFs even contain more than 100 investments, meaning there is no need to rely on one investment to generate a huge return for you. The immediate effect is that the investment lowers the overall risk.
The assets within the portfolio are being looked after by a portfolio manager, who keeps an eye on the markets and the investments within the ETF. If changes are necessary, they can be made with little effect to the ETF.
5. Annuities
When it comes to investing in any type of product, the return is an unknown. But with annuities, the return is clear: safe and with high returns.
An annuity is an investment product that has provisions in place in a form of a contract. The contract will feature the expected return that will be paid out, length of time of the contract, and how the return will be calculated. Annuities are offered by insurance companies and contracts are unique to each investor.
The way it works is that investors are taking an amount of capital and investing it with the insurance company. Based on this, a fixed or variable amount is paid to the investor. The return will be guaranteed, no matter the performance of the overall markets.
There is a possibility of having a hybrid annuity, paying a portion of the return on a fixed payment and the remaining as a variable one. This too will be based on the contract agreement in place.
Note that the insurance company is taking your money and attempting to generate a higher return then the one paid out to the annuity holder. Therefore, all the risk is in the hands of the insurance companies. All you would have to do once the contract is signed is collect your check and your free time.
6. Real Estate Investment Trusts (REITs)
Investing in real estate is a great method to generate wealth, and one that provides cash flow as well. Many investors are interested in real estate because the returns are highly correlated to inflation.
This type of investment requires a lot of legwork, since the assets need regular maintenance. Another issue is that there is a lot of capital required to make an investment into a property.
One way to get access to this sector–and with far lower requirements–would be by investing in a real estate investment trust (REIT). REITs allow you to participate in the upside of real estate assets and earn part of the cash flow, since 90% of the earnings are paid out to investors.
There are times a REIT investment will pay out a high dividend yield, sometimes even in the double-digits. As the property values increase, it should be reflected in the unit price, add to your bottom line.
Each REIT trades exactly like a stock does on the trading exchanges, and it is very similar to investing into a mutual fund or ETF.
Companies tend to focus on one area of real estate when it comes to REIT assets. A few examples would be commercial real estate, office buildings, medical offices, warehouses, apartments, and shopping centers. There are other REITs that focus on only financial products, such as providing mortgages and selling mortgage-backed securities.
A great benefit of owning a REIT over owning a single investment property is that the portfolio of assets will be low-risk with high returns due to the assets’ diversification. Also, there will be a professional team with years of experience managing the portfolio.
7. Certificates of Deposit
Certificates of deposit (CDs) are available at your local bank and may be one of the lowest investments available. CDs can be insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), which will guarantee the principal investment. If there is any issue with the bank issuing the CD, such as it no longer existing, you would still receive your initial capital.
The return is an interest payment for an agreed period; after said period ends, the principal will be returned and the interest earned. The longer the term of agreement, the higher the interest rate.
With CDs, there is no early redemption that can be made before the maturity date.
