During turbulent times like this, investors look for places to put their money that will return a competitive yield but are most interested in safety.
Getting the money back that they invested is often more important than buying something high risk in the hopes of a significant return.
Stocks have been shown to provide a good return over a long period. Still, investors with a shorter time horizon may find the ups and downs of the stock market to be inappropriate for them.
More conservative choices include savings accounts, certificates of deposit, bonds, bond funds, and select stocks with dividends. This article will focus on the differences between bonds, bond funds, and dividend stocks.
Conservative Investments in Bonds
Buying individual bonds is a low-risk investment choice. Bonds are not risk-free since there is the possibility that any bond issuer can default.
Bonds carry higher interest rates, the greater the chance that the money will not be paid back. Government-issued bonds have the highest degree of safety but still have some risk.
Except in the relatively rare case of default, a bond issuer will pay interest on the bond and pay back the principal at maturity. To be sure of getting the full principal back, the bond must be held to maturity.
If the bondholder tries to sell the bond before maturity, the sales price may vary from the face value of the bond based on current interest rates.
Investing in Bond Funds
Investors can also buy a bond fund, which is a group of bonds, similar to a stock mutual fund. Having a number of different bonds in a fund reduces the risk of default.
Although one of the bonds may default, the risk is spread over many investors. The manager chooses the bonds in the fund, and collects fees for his time, reducing the fund’s return.
Bond funds carry the same interest rate risk as individual bonds. Still, since the investor cannot choose to hold any of the bonds to maturity, bond funds will change price daily based on current market interest rates.
Dividend Stocks as Safe Investments
An additional option to remain conservative is to limit stock investments to companies that pay dividends. A dividend is paid to those that hold the stock as of a certain date (the ex-dividend date).
The stock price can still go down, but the dividend goes to the holder, increasing the return on the investment.
Companies can only pay the dividend if they are profitable. A company that is failing will eventually run out of cash and will have to suspend the dividend.
It is important to invest in a good company, not simply to choose a high dividend.
Buying a stock just before the ex-dividend date and selling just after the ex-dividend is not a good strategy. Since when dividends are paid, the stock price is reduced by the amount of the dividend.
Over the long term, a good company will maintain or improve its share price and pay a good dividend.
The most effective strategy for those with sufficient funds is to spread their cash over several conservative investments. Having some money in bonds, bond funds and safer stocks, along with some certificates of deposit gives the investor the best chance of making a safe, solid return