With stocks and bonds falling in 2022, you may be looking for safer investments this year – ones that can provide you regular income.
There are several options available. First, there are straight fixed-income investments.
A simple, low-risk possibility is a money-market fund. You can choose one that includes private-sector securities, which have a higher yield, or a fund with exclusively government securities, which provide more safety.
I own shares of both Fidelity Money Market Fund, which includes corporate securities and yields 4.14%, and Fidelity Government Cash Reserves, which includes only government securities and yields 3.87%.
If you’re looking for a higher yield and are prepared to hold your securities for an extended time period, you can buy Treasury securities. A six-month Treasury bill yields 4.75%.
Because the yield curve is inverted – meaning short-term yields are higher than long-term yields – there is no other Treasury maturity that yields more than 4.75%. You can get that same yield for a one-year bond if you want to lock in the interest rate for a longer period.
Treasuries are guaranteed by the federal government. So as long as you hold the paper until maturity, you’ll almost certainly receive par value when it matures.
CDs, Corporate Bonds Also Present Opportunities
If you’re looking for a longer-maturity holding, you might look at brokered certificates of deposit (CDs). These are bank-issued CDs that are sold through brokers such as Fidelity (where I’m a customer) and Charles Schwab. They are insured up to $250,000 at a single institution.
A five-year Morgan Stanley CD recently yielded 4.65%, well above the five-year Treasury yield of 3.97%. The CD, of course, has a lower yield than a six-month Treasury bill. But with the CD, you’re locking in that yield for five years, while with the T-bill, once you redeem it, rates could go any which way.
If you want higher yields still and are willing to take some risk, corporate bonds are a possibility. I own some bonds of single-A rated Toronto Dominion Bank. Its two-year bonds recently yielded 5%, compared to 4.46% for two-year Treasuries.
Just like with Treasuries, you generally want to hold your corporate bonds until maturity so that you can get back the bonds’ par value.
On the Equity Side, See Dividend Stocks
Another area you might consider if you can stomach some risk is dividend stocks. With safe dividend stocks, you can rely on a quarterly payment. And there’s a chance the share price will rise, though there’s also a chance it will fall.
You generally want to avoid stocks with the highest yields, as that’s likely a sign the share price has fallen. And if that’s the case, it often means the company has financial problems.
Instead, consider focusing on companies that consistently raise their dividends. You can choose your own companies in industries such as utilities and consumer staple stocks. Or if you want easy diversification, you can opt for exchange-traded funds consisting of dividend stocks.
I own shares of Vanguard Dividend Appreciation ETF (VIG), which focuses on companies that regularly raise their dividends. Morningstar gives the fund its highest rating of gold.
“Vanguard Dividend Appreciation takes a quality approach to equity income instead of chasing riskier high yields,” Morningstar analyst Lan Anh Tran wrote in a commentary. “Its profitable and established constituents should better insulate the portfolio from volatility.”
The fund had a negative total return of 9.8% last year, far outperforming the S&P 500, which had a negative return of 18.1%.
Looking at the big picture, if you do your homework, or have a good financial advisor that will do much of it for you, you can find income investments that round out your portfolio well.
