Ready to take on a little more risk for a higher potential return? While moderate risk investments come with some risk of principal loss, they also offer higher potential returns than low-risk investments. And their long-term risks — especially in the case of passively managed large funds — are historically relatively low.
🤓Nerdy Tip
For these investments, you’ll need an online broker. First, learn how to choose the best broker for you. Then, once you have a brokerage account, you can use its investment screener to help you shop for any of the investments below.
1. Corporate bonds
What are they? Corporate bonds are like a small loan from you to a specific company. The safest way to buy and benefit from corporate bonds is to identify stable companies with a long track record of repaying their debt to bondholders.
When you buy a bond with a fixed interest rate from a high-quality company — and you plan to hold it until it matures — it’s generally considered a safe investment. “High-quality” companies are often defined by credit rating agencies. Moody’s, for example, is a credit rating agency whose highest rating is “Aaa.” This rating is reserved for companies deemed to have the lowest level of credit risk. In the U.S., only Johnson & Johnson and Microsoft currently have Aaa ratings.
Current returns: The Moody’s Seasoned Aaa Corporate Bond Yield is now 4.95%.
What’s safe about them? Corporate bonds come with a promise from the company issuing them: to pay you a fixed interest rate over a specified period of time, and to pay back the principal amount at the end of that period. Typically, longer periods come with higher yields.
What’s the risk? If the company that issues the bond declares bankruptcy, it can default on its debt to you, meaning your fixed income disappears. But for strong, established companies, this risk can be relatively low.
2. Preferred stocks
What are they? Ownership shares of a company that offer shareholders priority over common stock holders regarding dividend payments.
Current returns: Varies by company.
What’s safe about them? Similar to bonds, preferred stocks offer a fixed return, which is often paid to investors quarterly. For example, if the share price is $100 and the annual dividend is $5, the dividend yield is 5%.
With most preferred stock, you’ll receive your dividend at the same rate you were promised when you purchased it, even if the market value of the stock falls. This is a difference from dividends of common stock, which can and do change. See our guide to preferred stocks for a deeper dive into these investment vehicles.
What’s the risk? Paying dividends is at the discretion of each company, and they can forgo payments in times of severe austerity — though most companies try very hard to avoid this, because it’s seen as a distress signal for the business. If the company goes bankrupt, bondholders are paid before preferred stockholders.
Also worth noting: The market value of preferred stocks tends to appreciate more slowly than common stocks from the same company. As with bonds, it’s often fluctuating interest rates — not company performance — that most heavily influence the value of preferred stock.
3. Dividend-paying common stocks
What are they? Ownership shares of a company that routinely pay owners a portion of the company’s profits, known as dividends.
What’s safe about them? When companies offer dividend-paying stocks, they pay you a specified amount on a regular basis based on how many shares you own, just like the preferred stock example above. This is typically paid out in cash quarterly or monthly. These payments can help offset drops in the stock price, potentially making the stock less volatile.
What’s the risk? The same risks of investing in any stock apply to dividend stocks — the stock price could fall. What’s more, companies are under no legal obligation to pay dividends to common stockholders, and it’s not guaranteed income, as a government bond is. If the company declares bankruptcy, dividends on common stock are last on the list to be paid back, behind bondholders and preferred stockholders.
4. Funds
What are they? A single investment that gives investors exposure to multiple assets. There are different types of funds, including mutual funds, index funds and exchange-traded funds (ETFs). Index funds and ETFs are passively managed types of mutual funds. Index funds are made up of stocks on a particular index, and mirror the success of that index. ETFs offer a lower minimum investment, and can be traded throughout the day like stocks.
Current returns: Fund returns vary widely, depending on the investments within the specific fund. However, an index fund that tracks the S&P 500 would historically have seen an annualized average return, not accounting for inflation, of about 10%. To see the current performance of other funds, see our list of best-performing mutual funds.
What’s safe about them? With funds, you’re not buying a single investment, but rather a basket of investments. These bundles may comprise stocks from various companies, government or corporate bonds, commodities or a combination of investments. Buying shares of funds can help you quickly build a diversified portfolio, as opposed to investing heavily in individual companies.
Many of the investments outlined above, like corporate bonds or dividend stocks, can be found in different funds. Dividend funds are made up of stocks with high and reliable dividends, bond funds are made up of various bonds, and so forth.
What’s the risk? Just like individual stocks, funds can fall sharply in the short term. These investment vehicles are better for long-term investors who are willing to weather the market’s inevitable ups and downs in exchange for stronger long-term growth prospects.
Some mutual funds are actively managed, resulting in higher fees. Over the long term, these higher fees can eat significantly into your returns. The key to improving your chances for higher returns is to look for inexpensive, passively managed funds with low expense ratios.