4 Less-Risky Investments to Gain From

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Are there less-risky investments to make?

All investments are not risk-free. They all carry one degree of risk or the other, depending on the nature of the investment, including those that are guaranteed to return principal.

Those who are willing to venture into the less-risky investments can substantially find better yields than those offered in other categories.

Here are a number of good less-risky investments with high return

Less-risky Investments with Preferred Stock

Preferred stock is basically hybrid security that trades similar to stock but acts more like a bond in many respects. It has a specific dividend rate that is normally around 2% higher than what treasuries or CDs pay and normally trades around a few amounts of the price at which it was issued.  

The main characteristics of preferred stock include:

Preferred offerings normally pay monthly or quarterly, and their dividends can also qualify for capital gains treatment in some instances.

Preferred stock also has very small liquidity risk, because it can be sold at any time without penalty.

The major types of risk that preferred stock carries are tax risk and market risk.

Types of preferred stock are few. They include:

Cumulative preferred: It accumulates any dividends that the issuing company cannot pay because of financial problems. Whenever the company is able to catch up on its obligations, it will then pay the shareholders all their past due dividends.

Participating preferred: It allows shareholders to enjoy larger dividends if the company is doing perfectly well financially.

Convertible Preferred: Preferred stock can be converted into a specific number of shares of common stock.

A large number of preferred issues are also graded by credit rating agencies like Moody`s and Standard & Poor`s, and their default risk is measured in a similar manner as for bonds. If the issuer of a preferred offering is very steady financially, then it will get a higher rating like AA or A+. Lesser rated issues will pay a much higher rate in return for higher risk of default.

Preferred shareholders are also entitled to get their money back from the issuer before common stockholders; in an event of company liquidation, however, they also don`t have voting rights.

Less-risky Investments with Utility Stock

Just like preferred stock, utility stocks tend to remain relatively constant in price, and payout dividends between 2% and 3% more than treasuries securities. These stocks can be bought through an online broker.

Some of the main characteristics of utility stocks include:

Utility stocks are general stocks that enjoy voting rights.

Their share prices are not stable like the preferred offerings.

They aren`t cyclical stocks, which means that their prices don`t rise and fall with economic contraction and expansion like some sectors such as technology or entertainment. Because people and business outfits always require gas, electricity and water irrespective of economic conditions, utilities are the most defensive sector in the economy.

Utility stocks are usually regarded by the rating agencies in the same manner as preferred issues and bonds; are completely liquid like preferred stocks, and can at any time be sold without penalty.

Utility stocks basically carry a slightly higher risk than preferred issues and are also subjected to taxation on both dividends and capital gain if any.

Less-risky Investments with Fixed Annuities

Fixed annuities are savings instruments designed specifically for conservative retirement savers, who seek higher return with the safety of principal. They possess several unique features. They include:

They permit investors to put a virtually unlimited amount of money away and allow it to grow tax-deferred until retirement.

Both the principal and interest in fixed contracts are backed by the financial strength of the life insurance companies that issue them, and also by state guaranty funds that compensate investors who purchased an annuity contract from an insolvent carrier. 

Although there have been cases of investors who lost money in fixed annuities due to issuing company gone bankrupt, the probabilities of this happening today are very low, especially if the contract is obtained from a financially sound carrier.

Fixed annuities also pay a lower rate to compare to the utility of preferred stocks, in return for their relative safety; their rates are generally between 0.5% and 1% above CDs or treasury securities. But, some fixed annuity agents will also offer a higher initial rate, or what is known as “teaser” rate, as a means of attracting investors. 

Also, there are indexed annuities that can give investors a portion of the returns in the equity markets at the same time guaranteeing principal. These contracts can provide a great return on capital if the markets do well. On the other hand, they may only offer a small consolation gain under bearish conditions. 

Annuities are similar to IRAs and qualified plans in that they greatly grow tax-deferred with a 10% penalty for withdrawals made before age 59 ½. And just like IRAs and other retirement plans, all categories of annuity contracts are unconditionally exempted from probate and also kept away from creditors in many cases.

The only major risks that come with annuities are liquidity risk (because of the early withdrawal penalty, including any surrender charges imposed by the insurance carrier), purchasing power risk and interest rate risk.

Brokered CDs

This type of CDs to a very large extent an attractive option for ultraconservative investors who can`t afford to lose any of their principal.  It has the following features:

Although they don`t pay rates that high like preferred or utility stocks, brokered CDs can pay reasonably more than their counterparts that are sold by personal bankers.

Brokered CDs are issued just like bonds and trade in a secondary market, however, are still insured by the FDIC – as long as they are held until maturity. If the CDs are sold before their maturity date, then the investor could get less than their face value in the secondary market.

Most brokerage firms sell this type of CD. The aim is to use them to attract customers from banks who are seeking higher yields.

Brokered CDs also carry the liquidity risk associated with any other type of bond and are also subject to taxation.

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