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ON THE MONEY: Low risk investment | Characteristics

If you’re a follower of Will Rogers’ “I’m more concerned about getting my money back than getting my money back” investment paradigm, the safest course of action (not including putting the money under a mattress) is to invest in completely risk-free investments, such as money market funds, certificates of deposit and US Treasury securities.

Unfortunately, such investments aren’t going to cut the mustard when it comes to generating enough returns to offset inflation, let alone provide you with meaningful income. (Being defensive in this market is a good idea)

If you need higher returns, with the possibility of some growth potential, you’re going to have to broaden your horizon and look for assets that offer a comfortable balance of high return and low risk. Low risk means there is less chance of losing your capital, but that can be offset by a higher return than you could get from completely risk-free investments.

One possible investment choice is to consider dividend-paying stocks. There are stocks whose dividend yields are much higher than what can be obtained in a risk-free investment. Two of these stocks are: Verizon, with a dividend yield of 4.6%, and is rated 3 stars by Morningstar; and Pfizer, a pharmaceutical company rated 4 stars by Morningstar, which pays a dividend rate of 3.5%. AT&T has a current dividend yield of 7.2%

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

For preferred shares, the holding period is more than 90 days out of a 181-day period that begins 90 days before the dividend payment date.

Speaking of preferred stocks, they have many of the advantages of bonds in that they trade in a very narrow range, pay a regular dividend, and are higher in the pecking order than stocks. ordinary. In addition, if a company is forced to reduce dividends, it must first reduce or eliminate the dividend at

common stockholders before reducing the preferred stock dividend. This fact makes preferred stocks an attractive low-risk option for a portion of your income portfolio.

Believe it or not, fixed annuities are making a comeback. For example, one A+ rated company currently offers a 5-year guaranteed interest rate of 2.45% on deposits up to $199,000 and 2.70% for amounts above that. This single premium deferred annuity product also only has a surrender penalty period of 5 years.

Peer-to-peer lending is becoming very popular, with companies such as Lending Club and Prosper. The funds for the loans that these companies offer come from individual investors, and there is a risk of loss.

However, when you invest through a Peer-to-Peer platform, you are not investing in whole loans, but rather in small portions of those loans. These small portions are called “tickets,” and they can be purchased in denominations as small as $25. Therefore, if you were to invest $10,000, you could spread your money over up to 400 loans.

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

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

Do you have a financial planning question for Greg? You can email him at [email protected]