ON THE MONEY: Low-risk investing

If you are of a devotee of the Will Rogers investing paradigm “I’m more worried about a return of my money that a return on my money,” the safest course of action is to invest in risk-free investments, such as money market funds, certificates of deposit, and U.S. Treasury securities. Sadly though, such investments are not going to cut the mustard when it comes to generating enough of a return to offset inflation, much less provide you with any meaningful income.

If you need higher returns, with the possibility of growth potential, you are going to have to broaden your horizon and look for assets that provide a comfortable balance of high return and minimal risk. Minimal risk means that there is a reduced chance of losing your principal, but one that may be offset by a higher return than you could obtain from investments that are completely risk-free.

One investment choice is to consider dividend paying stocks. There are two stocks available whose dividend yields are much higher than one can obtain in a riskless investment. Two such stocks are British American Tobacco with a forward yield 0f 7.29%, with a four-star rating, and Energy Transfer rated at five stars by Morningstar with a forward yield of 7.49%

If you own a stock long enough, the dividends that you receive will be taxed at capital gains rates. The Internal Revenue Service (IRS) requires investors to hold the stock for a minimum period of time to benefit from the lower tax rate that applies to qualified dividends. If you own common stock you must hold the shares for more than 60 days during the 121-day period that starts 60 days before the date that the dividend is paid.

 For preferred stock, the holding period is more than 90 days during a 181-day period that starts 90 days before the date the dividend is paid.

Speaking of preferred stocks, they have many of the advantages of bonds in that they trade in a very tight range; they pay a regular dividend; and they are higher up in the pecking order compared to common stock. In addition, if a company is forced to reduce dividends, it must first reduce or eliminate the dividend to the common stockholders before reducing the dividend on the preferred stock. This fact makes preferred stocks an interesting low-risk option for part of your income portfolio.

CD’s and single premium fixed annuities (from A+ rated insurance companies) are now offering higher rates of the return: upwards of 4% and higher with a five-year duration.

Peer to peer lending is becoming extremely popular, with firms such as Lending Club and Prosper. The funds for the loans that these firms offer emanate from individual investors, and there is the risk of loss.

However, when you invest through a Peer-to-Peer platform you do not invest in whole loans, but in small portions of those loans. These small portions are referred to as “notes,” and one can purchase them in denominations as small as $25. As a result, it you were to invest $10,000, you could spread your money across as many as four hundred loans.

These investment platforms enable you to choose the criteria that you will use to determine in which loans you will participate. For example, you can decide that you do not want to invest in loans to borrowers below certain minimum credit score levels. Or, you can set the criteria based on a certain minimum debt-to-income ratio, or even loan term or type.

Returns of 6-10% are not unheard of with this investment approach.