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2020 has been a rollercoaster for investors. On February 12 the Dow Jones, NASDAQ, and S&P 500 all finished at record highs. Two weeks later stock markets worldwide recorded the largest one-week decline since 2008. Global markets became extremely volatile in March. And this unpredictability has persisted for six months. Investors are looking for alternatives. Here is our guide to the safest high interest rate investments of 2020.
Safe High Interest Rate Investments
The Federal Reserve has cut its interest rates to as low as they can go, between 0% and 0.25%. The banks have followed suit. Subsequently, bank deposits are not going to ear you very much in terms of interest. Fortunately, it is possible to earn higher returns without taking too much extra risk.
Here are our safest high interest rate investments in 2020. Bear in mind that whilst these are safer investments, they are not no-risk investments and you can lose your money. That said you may be willing to take a bit more risk in return for higher rates whilst maintaining liquidity.
1. Corporate Bonds
If you are seeking higher yields and have a higher risk tolerance, high-grade corporate debt is a good option. These bonds are issued by high-performing corporations and will offer higher returns than treasury and money market accounts. As of June 2020, 10-year high-grade bonds offer an average interest rate of 2.36%.
These bonds are relatively safe but you can still lose money, specifically if interest rates go up. Because the rates that bonds pay are locked for a specified term, you will miss out on increase earnings if interest rates go up. If you need to sell your bonds you may need to do so at a discount.
You also need to be aware that if the issuer goes broke you will lose your investment. It is important to focus on highly rated companies, even if they offer lower interest rates.
2. Treasury Notes, Bills, and Bonds
If you are looking for less risk government bonds are your best option. Government bonds will offer better interest rates than savings accounts, up to 1.23% for a 30-year bond, but are incredibly safe.
US Treasury bonds are back by the US government. The US Government has always paid its debts, making these bonds reliable and easier to buy and sell on the secondary market. This is important if you might need to access your cash before the bonds mature. But keep in mind the price for safety is lower returns.
3. Fixed Annuities
In practice, fixed annuities work like a certificate of deposit. You agree to invest your money for a set period and you get a higher interest rate in return. Fixed annuity interest rates from 1.% to 3.60%. Keep in mind that the higher interest rates are typically offered by less well-regarded issuers. Meaning they are more likely to default on a payment to you.
When you purchase a fixed annuity you are agreeing to lock up your access to your money for the duration of the annuity. This lack of access is why these investments offer better returns than savings accounts. If you need to access your money before the maturity date you will be required to pay a penalty. You can find annuities that offer penalty-free access to a percentage of your money each month.
4. Preferred Stocks
Preferred stocks work like a hybrid of bonds and stocks. You get the reliability, safety, and regular payments of bonds with the potential for appreciation from stocks. Preferred stocks often pay higher dividends than bonds because unlike bonds the payments are not completely guaranteed.
Preferred stocks offer an average annual return of more than 7%, most of which come from dividend payments.
In addition to dividends, you might see your investment grow through a buyback. Companies will offer to buy back preferred shares at a higher price than they were sold because these stocks pay higher dividends and subsequently cost the company more than corporate debt.
5. Common Stocks That Pay Dividends
Common stocks are also a relatively safe option in our current environment. The best common stocks are real estate trusts (REITs) and utility stocks. These have been historically safer, less volatile, and much more reliable in their dividend payments. These of some of the best current high interest rate investments.
REIT dividends pay 3.93% on average and utility dividends produce returns of 3.11%. Common stocks do not guarantee dividends. Some are better than others in paying dividends so prioritize these. And remember that like all stocks you may lose any money you invest.
When investing in common stocks in 2020 it is best to stick with strong reliable names. Companies that have been around for decades with a track record of paying consistent and reliable dividends. Avoid growth or speculative stocks that live and die by market movement and investor enthusiasm.
6. Index Funds
One of the biggest issues with preferred and common stocks and bonds is that they are not diversified. If you only invest in one or two companies you take on the risk of those companies under-performing or going under.
Index funds allow you to essentially buy the market. When you invest in an index fund you are buying hundreds or thousands of individual stocks and bonds. This diversification reduces your exposure to risk significantly, whilst still offering elevated interest rates and dividend yields.
Investing In 2020
There is a lot of uncertainty in 2020. But this does not mean you should not be looking for high interest rate investments. Putting your money to work for you by investing is still important when managing your money and planning for the future. You just need to know where and how to invest and if you follow our guide you will have plenty of options. If you enjoyed this article check out the rest of our finance blog.