When volatility picks up, investors flock to safety. It’s not a recent investment thesis or one derived from algorithmic trading. It’s a long-time reaction that’s generally driven by human psychology. As fears rise, investors first seek cash and then look for safe high-yield investments.
However, it’s important to remember that there’s a difference between safe high-yield investments and guaranteed returns.
Where can we find guaranteed returns? There was a time where the bank would pay a decent return on CDs or money market accounts. Heck, even our savings account used to pay us a decent, risk-free return. But with the Federal Reserve driving interest rates down to zero during the financial crisis, our risk-free returns simply vanished.
It’s left investors chasing what they consider safe high-yield investments instead. In particular, it’s left retirees in a bind.
So, what are some options in today’s market?
Safe High-Yield Investments
Just because there’s a juicy yield, doesn’t mean investors should buy. Too high of a yield is actually a red flag from an investment standpoint, as investors’ principal could be at risk. That said, some of the best high-yielders in the market come from REITs — or real estate investment trusts — as they must pay out 90% of their earnings as a dividend.
The group was recently added to the S&P 500, which now boasts 11 different sectors. Not long ago, I covered a few of my favorite picks in the space, which include Realty Income Corp (NYSE:O), Ventas, Inc. (NYSE:VTR) and Digital Realty Trust (NYSE:DLR).
Why do we like these three? For starters, O, VTR and DLR have dividend yields of 5%, 6% and 3.7%, respectively. Second, they are leaders in their respective operations. Realty is a top-class renter to retailers across the country, while Ventas runs a growing network of healthcare facilities. DLR runs data center locations, and you don’t have to listen to too many earnings reports to know demand here remains strong.
This space doesn’t come without risk, though. When there’s sudden surges in interest rates — like the start to 2018 — this space falls out of favor. That’s true even if the economy remains strong and secular demand for these businesses remains intact. Still, O, VTR and DLR have paid the price this year and have each seen their stocks hammered. But these are great companies with excellent businesses. Betting on them after such a hammering might make sense for some investors.
For some investors, though, stocks may be too risky.
Looking for Guaranteed Returns
The most obvious place for guaranteed returns comes from Treasury bills, notes and bonds. For quick reference, Treasury bills — or T-bills — mature in one year or less. Notes mature in two to ten years and Treasury bonds mature in 10 to 30 years. From a default standpoint, Treasuries are considered risk-free by most investors.
Right now, 1-year T-bills are yielding about 2.25%, while the 2-year is yielding about 2.5%. However, the 10-year yields about 3% while the 30-year bond yields 3.2%. From a yield perspective, the 1-year bills look pretty attractive, given that they pay out 2.25% and have little risk attached to them — so long as investors can hold onto them until maturity.
Another consideration would be TIPS — or Treasury Inflation Protected Securities — which remove the inflation risk.
While they may not be safe high-yield investments, investors can also consider low-yield, highly-rated municipal and corporate bonds. Short-duration AAA and AA bonds for these categories may rival that of short-duration Treasuries. But once maturity is three years out or more, these groups begin to yield more.
Note that these are not guaranteed returns, but they are highly, highly likely returns. Investors who feel comfortable doing so, can buy bonds in individual stocks. For instance, Apple Inc. (NASDAQ:AAPL) has a 10-year bond paying about 3%, while Starbucks Corporation (NASDAQ:SBUX) just closed two recent bond offerings, one maturing in 2023 and yielding 3.1%, with another maturing in 2028 and yielding 3.5%.
The bottom line is simple: finding guaranteed returns in this environment is tough, but it’s not impossible. Blending low-risk, low-return investments with safe high-yield investments may be one way to go for investors as well.