May 15, 2020

Low Risk Investments With High Returns

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What types of investments pay good returns? Skip high risk options. Find out the safest investments with the highest yield.

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You can't get good returns without high risk, right? Not always.

There are plenty of low-risk investments that still offer higher than average profits. But before you jump in, make sure you won't need the money soon. Some options need plenty of time to earn you high-yield returns.

Check out this list of investments to get started.

Top Low-Risk High Yield Investments

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Savings Accounts

You probably wouldn't expect to see savings accounts as an investment, especially if you've driven past your local bank lately and seen the paltry interest rates they offer.

But your local bank isn't the only place to invest your funds. Online high-yield savings accounts offer decent interest rates (returns) and are great for those looking for practically no-risk investments with a decent return.

Certificates of Deposit

A CD (Certificate of Deposit) is like an investment, just with the bank. You promise to invest a specific amount of money for a specified period. At the end of the contract (maturity), you will earn back your investment plus the promised interest. The interest is a fixed rate of interest, so you don't have to worry about falling rates.

You can invest in short-term or long-term CDs. The longer the term, the higher the interest paid. Typically, banks (choose online banks for the highest yields) pay higher rates for longer terms.

Be careful though, if you cash the CD in early, you'll pay a prepayment penalty equal to a percentage of the interest you would have earned.

Benefits:

  • CDs are FDIC insured, which means you'll receive your payment even if the bank fails up to $250,000.
  • You know the amount of your return and when you'll receive it
  • You can choose from a wide number of terms and rates

    CIT Bank

    CIT Bank Term CDs

    • Up to 1.05% APY
    • $1,000 minimum opening deposit
    • No monthly maintenance fee
    • FDIC insured
    TermCD Rates
    6 Month0.50% APY
    1 Year0.50% APY
    13 Month0.50% APY
    18 Month0.50% APY
    2 Year1.00% APY
    3 Year1.00% APY
    4 Year1.05% APY
    5 Year1.05% APY

Money Market Accounts

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Money market accounts are like savings accounts, but with a twist. You'll need a higher deposit (in most cases), but you'll earn a higher rate of interest.

You may only make up to six withdrawals per month, like a savings account, and many accounts come with a debit/credit card and a checkbook, but again, with the same withdrawal limits.

Benefits:

  • Money market accounts typically pay much higher APYs than savings accounts
  • Money market accounts are FDIC insured, which means your investment is safe up to $250,000
  • You have easy access to your money, should you need it in an emergency

Bonds

You can invest in savings bonds, corporate bonds, or municipal bonds. Savings and municipal bonds have lower risk because they are backed by the U.S. government, whereas corporate bonds are issued by public companies that could, in reality, default.

Savings and municipal bonds have maturity dates as long as 30 years. If you cash in the bonds early, you get the stated interest rate, but pay an early withdrawal fee, which takes away from your investment. Corporate bonds may pay higher interest rates, but generally carry a higher risk.

If you prefer to diversify your risk, you can invest in corporate bonds through ETFs, which gives you a chance to choose bonds with varying maturity dates and risks.

Benefits:

  • There's less volatility than you'd experience with stocks
  • Bonds can be liquid (just watch the early withdrawal fee)
  • Bondholders often have first dibs on a company's liquidation should they go out of business
  • Government-issued bonds have virtually no risk

TIPS Treasury Inflation Protection Securities are government issued bonds with little to no risk. TIPS earnings are twofold. You'll earn a fixed interest rate for the bond's entire term. The second is an inflation protection: Your investment grows with inflation each year, giving you even more earnings than the fixed interest rate would provide, which at first glance, may seem rather low. With their low risk of default, TIPS are a great way to invest in bonds.

Where to Look
You can buy bonds directly from the government, through a brokerage, or via mutual funds or ETFs.

Fixed Annuities

An annuity is a contract between you and typically a life insurance company. You pay for the contract and the annuity provides you with a regular stream of income according to the terms of the contract. You have a guarantee of principal repayment plus a guaranteed rate of interest.

Fixed annuities aren't tied to a specific index—you know your rate of return upon purchasing the annuity. You also choose the terms of the annuity, such as a lifetime annuity or payments only for a specific term.

Benefits

  • Fixed annuities are straightforward and predictable
  • The interest rate is fixed and not tied to an index, so you don't have to worry about losing money
  • You'll know how much money you'll have coming in during retirement

Where to Look
Insurance companies and brokerage firms offer annuities. Always check the financial rating of the company in Moody's or Standard and Poor's to ensure the validity of the annuity as they are not guaranteed by the government or the FDIC.

High Yield Investments with Medium Risk

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If you want to take a slightly higher risk, but not put yourself in the high-risk category, the following investments may provide slightly higher returns in exchange for the risk taken.

Peer-to-Peer Lending

As the name suggests, you lend money to peers or other consumers that wouldn't be able to secure money from a bank. You can invest as little or as much as you want (some companies require at least $25 investments) and you can diversify your investment.

In other words, you don't have to put all of your money in one person—you can lend small amounts to multiple borrowers, along with other investors.

You receive monthly payments of principal and interest according to your investment and you choose the level of risk. P2P companies rate borrowers based on their risk level—the higher the risk you take, the higher the interest rates charged or that you earn.

Benefits

  • You can take as little or as much risk as you want, diversifying your investments for maximum returns
  • You can reinvest your earnings or withdraw them as you need
  • You can earn much higher rates if you take on risky loans
  • The P2P lender does all of the work for you

Where to Look

  • LendingClub lets you invest with as little as $1,000, diversifying your investment in $25 increments across a variety of loans.

  • Prosper lets you invest with as little as $25 in each loan and diversify your risk.

Real Estate—Crowdfunding

Invest in real estate without the need for excessive capital or knowledge in the real estate industry. Like traditional crowdfunding, you invest with hundreds of other investors, investing in residential or commercial real estate.

You can invest directly in the companies building or buying the real estate or with originators that already funded the loans, but want to sell them on the secondary market. Like peer-to-peer lending, there's a risk of default, but you can choose the level of risk you want to take by reviewing the qualifications and ratings.

Benefits

  • Access to real estate investments with low capital requirements
  • Diversify your investments to offset risk and maximize returns
  • Diversify your investments in different geographic regions
  • You don't have to do any of the administrative or physical work involved in investing in real estate

Preferred Stock

Preferred stock has a lower risk than common stock, but a slightly higher risk than bonds. Preferred stockholders receive dividends or a portion of the company's profit sharing, but they can also be called at their par value by the company up to five years after being issued.

Unlike bonds, though, preferred stock never matures; in other words, if the company doesn't call it, you can keep the investment indefinitely.

Benefits

  • Preferred stocks often pay higher dividends than common stock
  • Preferred stock owners own equity in the company, which means your investment can do better than the current interest rates
  • Preferred stockholders get paid before common stockholders should the company liquidate

Where to Look
You can typically buy preferred stock through any online broker.

Utility Stock

Utility stocks are common stocks, but you invest in utility companies, which are generally more stable and reliable than private companies. Most utility stocks pay dividends and you can buy them through most traditional online brokers.

Utility stocks are less affected by market fluctuations as everyone always needs utilities. Utility stocks work like any other stock in the sense that you can buy and sell as you see fit without risk or penalty.

Benefits

  • Utility companies typically have pretty steady dividends to pay out since they have stable income due to the necessity of their services
  • They are more liquid than other investments, such as CDs and bonds, since you can sell them at any point
  • Utility stocks are less volatile since most investors hold onto them because of their low risk

Where to Look
Just like preferred stocks, you can buy utility stocks with your favorite online stock broker.

Dividend Stocks

Dividend stocks pay more than just profits when you sell for more than you bought it. They also pay dividends periodically, which are a portion of their profits.

Like any stock purchase, it's important to do your research. Watch out for inflated dividends that are often a sign of a stock performing badly and lower dividends moving forward.

Benefits

  • You may receive regular income from dividend stocks depending on their payout schedule
  • You can reinvest the dividends for further investments or take the income
  • Companies that pay dividends are typically top-performing companies with steady stock prices overall

Where to Look
Just like preferred stocks, you can buy dividend stocks with your favorite online stock broker.

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Covered Call Options

Buying options does require a little experience buying and selling stocks, but when done right, it can yield higher profits.

Covered call writing means that you sell the right to buy the stock that you own at a specific price (strike price) to another investor. If the price hits your strike price before the call expiration, you must sell the stock to the buyer.

But, if the stock price doesn't rise (which you hope it doesn't), you earn the premium from the call option that you sold plus you keep ownership of the stock.

Benefits

  • You earn potential income from selling the covered call option
  • You choose the sell price or the strike price, choosing the one that means you still make a profit
  • It's a good option for medium volatility stocks

Where to Look
Many online brokerage firms allow you to buy and sell call options. Make sure you understand how they work and have experience trading stocks before you jump into it.

Other Options

Other ways to earn high yield investments with low risk that may not necessarily be investments in the true sense of the word, but still work, include:

  • Earn a bank bonus. Many banks offer bonuses for opening a new account. Find a bank offering the largest bonus for the amount you have to deposit and take advantage. Just make sure you can fulfill any requirements, such as a specific number of direct deposits or a minimum average daily balance.

  • Open an online checking account. Some online banks offer interest on their checking accounts. Make sure you can meet the requirements to earn the interest though, whether it's a specific minimum balance and a certain number of direct deposits.

  • Cash back credit cards. If you normally use a credit card for purchases, why not earn rewards for it? Whether you make large purchases or your everyday purchases with a credit card, there are hundreds of options out there that will give you cash back for your purchases. Just make sure you use the credit card wisely.

  • Cash value life insurance. Permanent life insurance policies, such as whole life or universal life, grow a cash value on top of the death benefit. Depending on the policy, you may be able to borrow against the value or even withdraw from it over time, giving you an income stream from your earnings.

Bottom Line

Explore your options for high-yield investments with low risk—there's something for everyone. Make sure you know the risks involved and have enough money saved in your emergency fund should the unexpected occur and you need to tap into those funds.

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TD Ameritrade has not influenced the content of CreditDonkey. CreditDonkey may earn compensation for accounts opened at TD Ameritrade.

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