Moderate-risk investments
Unimpressed with the yields above and willing to take on a little more risk for a higher potential return? Explore the options below. While they come with some risk of principal loss, they also offer much higher potential returns than investments listed above, and their long-term risks — especially in the case of mutual funds — are often relatively low.
Dividend-paying common stocks
What are they? Ownership shares of a company that routinely pay owners a portion of the company’s profits.
Current returns: See our list of high-dividend stocks for recent figures.
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.
What’s the risk? The same risks of investing in any stock apply to dividend stocks. When the price of common stock falls, the amount you’ll receive in dividends can fall, too — and that’s in addition to the money you lose if you eventually need to sell the stock for less than you purchased it for.
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.
Where can I get one? At an online broker.
Mutual funds
What are they? A single investment that gives investors exposure to multiple assets.
Current returns: See our list of best-performing mutual funds for recent figures.
What’s safe about them? With mutual 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 mutual funds can help you quickly build a properly diversified portfolio, as opposed to investing heavily in individual companies.
Many of the investments outlined above 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. Again, the goal here is diversification and spreading your risk.
What’s the risk? Just like individual stocks, mutual 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.
If you’re new to these instruments, consider learning more about mutual funds. We recommend using low-cost mutual funds to form the basis of any long-term portfolio.
