Safe Investments With High Returns: Get a Guaranteed Rate of Return on Your Money

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There's no doubt about it: Interest rate returns have been poor for years. But if you are seeking safe investments with high returns and guaranteed rate of return, all hope is not lost.

Let’s be clear — generally, the safest investments produce the lowest yields. And while the investments are undoubtedly safe, there is an often-overlooked risk you should be aware of: inflation. A safe place to park your money might return 2% guaranteed, but if inflation reaches 4%, did you make anything in return? The answer is no.

High Dividend Stocks

Though not technically fixed-income investments, high dividend stocks can be considered safe and offer an almost guaranteed rate of return. With dividends, there is always the risk of loss of principal, because the price of an individual share could decline at any time. But at the same time, there is also the possibility of major growth, if the price of the stock rises.

Investor Junkie keeps track of the 50 companies from the S&P that have increased their dividends to shareholders for 25 years straight. There are high dividend stocks available from iconic companies that have a long history of paying out and increasing dividends. Some of those stocks include:

  • Coca-Cola (KO) currently pays an annual dividend yield of 3.53%
  • Johnson & Johnson (JNJ) currently pays an annual dividend yield of 2.62%
  • Procter & Gamble (PG) currently pays an annual dividend yield of 2.94%
  • 3M (MMM) currently pays an annual dividend yield of 2.62%

You can buy dividend stocks with an online broker like Ally Invest, but picking up the right ones is the hard part.

Certificates of Deposit (CDs)

CDs are an investment contract you have with a bank to pay you a guaranteed rate of return when you deposit money for a specified amount of time. CDs are among the safest investments out there since there is virtually no risk of loss of principal. Moreover, they come with FDIC insurance of up to $250,000 per depositor.

Terms for CDs can range anywhere from 90 days to 10 years. The more you deposit and the longer you leave it with the bank, the higher the guaranteed rate of return. For example, a deposit of $1,000 today, held for one year, is going to yield around 1.3% ($13). But if you deposit $10,000 and agree to keep it for five years, it will yield approximately 2% ($200).

Money Market Funds

Money market funds are REALLY safe mutual funds. Money market fund managers invest only in short-term, interest-bearing securities, such as U.S. government bonds. And just as with CDs, if you invest in a money market fund through a bank, you will have FDIC insurance. The incidence of loss of principal on money market funds is practically nonexistent.

So what kinds of returns can you get from U.S. government bonds these days? Well, in 2007, you could invest in a money market fund and get a 4.5% return. Today, in 2017, average returns hang around 1% to 1.5%.

U.S. Treasury Securities

U.S. Treasury Securities are a way for you to buy America’s debt. You can purchase U.S. Treasury securities through the Treasury Department's bond portal, Treasury Direct. In denominations as small as $100, the government will sell you Treasury bills (maturities of 52 weeks or fewer), Treasury notes (maturities of two, three, five, seven and 10 years) and/or Treasury bonds (30-year maturities).

Since it is the government you are buying from, the interest payments on whatever form of security you purchased are guaranteed. However, keep in mind that the principal, the money you invest, could decline if interest rates rise. For that reason, if you're looking for 100% safety, you should stick with Treasury bills and short-term Treasury notes.

Current Treasury yields look like this (as of Feb. 28. 2017):

  • One-year Treasury bill, 0.88%
  • Five-year Treasury note, 1.89%
  • 10-year Treasury note, 2.36%
  • Treasury bond, 2.97%

Treasury Inflation-Protected Securities (TIPS)

TIPS are another investment option offered by the U.S. Treasury. TIPS pay interest like Treasury bonds, notes, and bills — but TIPS actually account for inflation! So at first glance, even though the interest rates for TIPS appear to be lower (0.8% for a 30-year), you need to remember that the real return is adjusted for inflation, which moves TIPS closer to the yields on other government securities of comparable maturities.

TIPS can also be purchased and held through Treasury Direct.

There are caveats with TIPS that you should be aware of:

  • The principal adjustment for inflation isn't paid until the securities mature
  • The principal adjustment for inflation is fully taxable, which reduces the protection they provide
  • Increases in principal are taxable for the year in which they occur, even if your TIPS hasn't matured — meaning you could pay tax on income you haven't received
And this is just a personal opinion, but the U.S. government determines inflation using the CPI Index. I have serious doubts that the CPI is a reliable indication of the true rate of inflation. The index has been modified over the years to make it appear that inflation is lower than it is. If the Bureau of Labor issues an inflation rate of 1.5%, but the real rate of inflation is more like 3%, you'll actually lose money on your investment in real terms. So when you consider TIPS, remember it is the government’s perspective of inflation that’s being accounted for — not the inflation you encounter when you’re at the grocery store or buying a new home.

Municipal Bonds

Municipal bonds are just like U.S. Treasury bonds, except you are buying the debt at a state or city level, not at a federal level. “Munis,” just like Treasury bonds, provide a guaranteed rate of return, AND the income you earn from munis is tax-free. But there are two things to keep in mind:

  1. Munis are long-term investments, generally 20-plus years
  2. Interest rates are currently at historic lows

That's a toxic mix. Long-term bonds run inverse to interest rates. This means if interest rates rise, bond prices go down. So if you invest in a 20-year municipal bond issued by your state at 2% today, and two years from now the going rate for a similar bond is 4%, the market value of your bond will tank.

There is a workaround, however. By investing in short-term municipal bond funds, you can collect tax-free income without the risk of losing your principal to market reactions from interest rate swings. One such fund is the Vanguard Short-Term Tax-Exempt Fund Investor Shares (VWSTX). The fund invests in high-quality, short-term municipal securities with an average duration of one to two years and has a 10-year average return of 1.64%. If your combined federal and state marginal tax rate is at 40%, the equivalent return on a taxable investment would be around 2.73%.

Annuities

I hesitated to include annuities here because they incorporate a fairly long list of both positive and negative attributes.

On the positive side:
  • Annuities often pay returns considerably higher than other fixed-income investments
  • Annuities grow on a tax-deferred basis, even though they are not held in a tax-sheltered retirement plan
  • Annuity returns can be guaranteed by the insurance company
  • Annuities provide you income for life… that will continue to be paid to you even if the principal value has been depleted
On the negative side:
  • An annuity may pay a 6% rate of return but charge you 2.5% in fees
  • No liquidity — by investing in an annuity, you are investing in future income and will not collect back that original investment
Annuities are better suited for retirees strictly seeking income because once you invest in an annuity, the principle that you invest will never be available to you — BUT you will have guaranteed income for life. So think about where you are in life and whether or not this is an option to explore.

Paying Off Debt — An Unexpected Guaranteed Rate of Return

Hands down, this is probably the only true risk-free chance you have at earning double-digit returns on your investments. And it will be virtually a guaranteed rate of return at that.

Let's say that you owe $10,000 in credit card debt, with an annual interest rate of 14%. By paying off the card, you are in effect getting a 14% annual return on your investment, as a result of the interest that you no longer have to pay.

What's more, if you have liquid cash invested at an average of, say, 2% but you have credit card debt requiring double-digit interest, you are losing money by not paying off that debt. Paying off debt is a guaranteed win.

Peer-to-Peer (P2P) Lending

P2P lending is when you, as the investor, “play the role of banker” for individuals in need of a loan. These individuals may need funds to consolidate debt, pay medical bills, buy a car or even invest in a business. And for one reason or another, they have chosen to borrow from P2P rather than a traditional bank. As the “lender,” you then receive the interest on that loan, directly. Thus, this is one way to earn a steady return on your money. One lender we really like is Prosper.

That said, all P2P lending platforms do carry the risk of borrower default. For one thing, the loans are not secured. For another, the platforms mostly came into existence after the 2008 financial meltdown, which is to say that they haven't weathered a full-blown recession to give an accurate idea as to how well they will perform.

Summary

The low-interest environment we are in today, coupled with the booming stock market, makes it tough to find returns of 2% to 4% attractive. However, if you simply want to preserve capital, which is a great idea, any of the options mentioned above might work. You can always consult online stock brokers for advice.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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13 Comments

  1. You made a great point about money market funds being very safe and how they come through short-term things. My husband and I are looking for an ROI advisor that we can get for our investment opportunities. We will keep these tips in mind as we search for a professional that can help us best.

  2. I am going into retirement at age 60 (beginning of 2019) I am thinking an annuity with half my retirement savings. They are charging .95%. This does give me a guaranteed income for life on half my money and I know I will never see that principle again. I am looking for security but also leaving half my money to be available to me in the future should I need it, Thoughts?

    1. Does the intrest on the annuity go up in high inflation environment? I am trying to find annuity that when/if inflation and intrest return to normal I keep up. For example on anuity paying 5% (3% above inflation), can I find one that will pay 9% when inflation goes to 6%. Or like when I started saving pay 13% in 10% inflation environment?

      1. I want to plan to be okay in times like the 30 years before the fed cut rates to 0% (1977 to 2007) using core inflation the total inflation went up 243% or over 8% if looked at linearly.

  3. Paying off debt seems to be a foolish thing to do if your money is in an IRA. You’d have to pay taxes on the money withdrawn and that would always be much more than what you could pay down in debt interest. Maybe I’m missing something?

  4. Why would anyone want to have their savings and protection together? Whole life policies don’t even start accumulating money until the 3rd or 4th year, and heaven forbid you pass away — all the money paid in goes right back to the company! Buy term and invest the difference – it’s cheaper and YOU are in control of your investments.

  5. Only a few of the aristocrats pay more than 4% dividends (CTL, CINF ED PBI LEG) those should be worth looking into. My REIT pick is NLY, which should be safer now knowing the rates won’t rise for 2 years.

  6. I know this might not be the most appropriate place to post this but for other readers living in the USA are you concerned about the debt? It just seems like it is getting to the point where the country is going to go bankrupt and my husband and I are just a little concerned that our kids and grandkids are going to have some big problems in a few years. Thanks for letting me vent, Sara

  7. You forgot an investment that will consistantly beat 4%. Parcipitating whole life insurance. I should probably be more specific than that because I wouldn’t go so far as to say any policy will. That’s the tricky part. Most people (including those who sell the policy) don’t know how to set up the policies properly to get competitive rates of return. It’s all in how you fund it. I properly set up whole life insurance policy can easily give you a return over 4% with built in guarantees. It’s nice to not have to worry about down years.

  8. Great post, and you’re absolutely right, most of us don’t consider inflation and taxes, we just blindly invest and/or save our merry way forward and think we’re getting an okay deal.

    One of the changes I made this year was making sure 100% of my “savings” money was sitting in an investment account. That just sets me up to do something more with it than just let it sit there at 0.50%. We took minimal risk, but were rewarded (for now) with the rising stock market.

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