In case you haven’t noticed, interest rates are ultra low right now. The Federal Reserve has cut its key interest rate about as low as it goes: zero to 0.25%. The banks have followed suit, and average savings accounts are paying about 0.06% APY.
While a few high-yield bank accounts are offering rates that are somewhat higher than this, bank deposits won’t earn you very much in terms of interest. Thankfully, it’s not impossible to earn higher returns without taking on too much additional risk.
Here are seven low-risk investments to safely grow your money.
Best Low-Risk Investments
These seven investments can help boost your returns more quickly than the average savings account. Keep in mind, however, that while these are low-risk investments, they aren’t no-risk investments. Unlike bank accounts, these products are not FDIC insured—you can still lose money.
That said, you may be willing to take on a little extra risk in exchange for higher rates of return from products that still offer great liquidity and ease of access. To maintain good financial health, make sure you have a fully stocked emergency fund before investing extra cash that you may need in a pinch.
1. Treasury Notes, Treasury Bills and Treasury Bonds
If you want to earn a slightly better interest rate than a savings account without a lot of additional risk, your first and best option is government bonds, which offer interest rates from 0.09% for a duration of one month, up to 1.23% for a duration of 30 years (as of mid-August 2020).
Bonds issued by the U.S. Treasury are backed by the full faith and credit of the U.S. government, which carries a lot of weight. Historically, the U.S. has always paid its debts. This makes government debt reliable and easier to buy and sell on secondary markets, if you need access to your cash before the debt is mature.
This stability, however, means bonds may have lower yields than you might earn from bonds where the debt was less likely to be paid back, as is the case with corporate bonds.
2. Corporate Bonds
If you’re willing to accept slightly more risk for higher yields, high-grade corporate debt might be a good option. These bonds—issued by established, high-performing companies—typically offer returns that are higher than Treasuries or money market accounts. As of June 2020, 10-year high-quality bonds offer average interest rates of 2.36%, according to the St. Louis Federal Reserve.
While high-grade corporate bonds are relatively safe, you can still lose money investing in them if:
- Interest rates go up. Because the interest rates bonds pay is generally locked in for a certain term, your money won’t earn the higher rate. If you need to sell your bonds, you may also have to sell them for less than you may have paid for them if overall interest rates have risen. If you hold your bonds until maturity, you will receive back their face value plus interest.
- The issuer goes broke. Though investment-grade bonds are generally considered relatively safe investments, they still aren’t as secure as money held in bank accounts. That’s why it’s important to focus on debt issued by highly rated companies that are most likely to pay you back. Less highly rated companies may offer higher interest rates, but they are also more likely to lose you money.
3. Money Market Mutual Funds
Money market mutual funds invest in overnight commercial paper and other short-duration securities. Even the best money market funds typically offer next-to-no yield. Unlike Treasury products and corporate bonds, however, money market funds do offer investors absolute liquidity: They experience virtually no volatility, and you can pull your money out at any time.
It’s also worth noting that many banks also offer money market mutual funds. If you don’t have or don’t want to set up a brokerage account, you still may be able to invest money market funds through your bank.
4. Fixed Annuities
Fixed annuities are a type of annuity contract that allow investors to pay a lump sum upfront in exchange for a series of payments over time. Functionally, fixed annuities work a lot like certificates of deposit: You agree to lock up your access to your money for a set period of time, and you get a higher than average interest rate in exchange. As of mid August 2020, fixed annuity interest rates range from about 1.0% to 3.60%, according to Blueprint Income, a fixed annuity marketplace. Keep in mind, though, that higher interest rates often come from less well regarded insurers, meaning they are more likely to default on payment.
Also remember that, like CDs, you may incur penalties if you need access to all of your money before the maturity date of your fixed annuity. You will, however, generally receive penalty-free access to a percentage of your money each month.
5. Preferred Stocks
Preferred stock works like a hybrid of stocks and bonds: It offers some of the potential for appreciation you get from common stocks while also providing the dependable income payments of bonds. In fact, preferred stock frequently offers higher dividend payments than companies’ bonds because, unlike bonds, payment is not completely guaranteed.
Since 1900, preferred stocks have offered average annual returns of more than 7%, most of which are from dividend payments.
In addition to dividends, you may see your investment grow through a buyback. Recently many companies have been buying back preferred shares, usually at a slightly higher price than they were sold for, because preferred stocks pay higher dividends—and therefore cost companies more—than corporate debt.
6. Common Stocks That Pay Dividends
Outside of preferred stock, some common stocks are also relatively safe options for those after a higher yield in this low-interest-rate environment. Chief among these are real estate investment trusts (REITs) and utility stocks, which are historically viewed as safer, less volatile, and more reliable in their dividend payments.
As of January 2020, REIT dividends have paid 3.93% on average, and utility dividends have averaged 3.11%, according to data analyzed by NYU’s Stern School of Business.
Regardless of the industry you invest in, when choosing common stocks it’s best to stick with strong, solid names that have been around decades and pay consistent, reliable dividends—not growth stocks that live and die by investor enthusiasm.
Keep in mind, though, that common stock dividend payments aren’t guaranteed, and like all stocks, you may lose money when you invest in them.
7. Index Funds
Individual equities, like common and preferred stocks or bonds, are not diversified. You may only buy stock or bonds from one or two companies, making them inherently very risky. What happens if those companies go under?
Index funds allow you to invest in hundreds or thousands of individual stocks and bonds. This greatly decreases the risk you take on when you invest while still offering elevated interest or dividend rates. Diversified, higher-rate funds include PIMCO’s BOND fund or Vanguard’s BND or VDADX (Dividend Appreciation) funds.
The Bottom Line
You should always have cash reserves in a liquid savings account that you can tap quickly if necessary. But for money that you need to be somewhat liquid but hope to earn a higher return on, you do have options. Money market funds, annuities, government and high-grade corporate debt are some of the best low-risk, higher-yield ways to grow your money even when interest rates are low.