The S&P 500 is up 15.4% in the three months ending Jan. 23, while both inflation and mortgage lending rates seem to be coming down. Yet household costs remain high (especially food, energy and consumer insurance costs), and military conflicts in Ukraine, Gaza and other parts of the Middle East represent real economic and stock market risks.
Toss into the mix a volatile U.S. presidential election and artificial intelligence’s rising impact on human labor, and 2024 promises to be anything but a stable year for investors.
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If risk-sensitive investors aren’t sure about the stock market and seek lower-risk investments right now, where should they cast a line?
Investing experts point to these low-risk but still profitable portfolio plays:
— Bonds
— Dividend stocks
— Utility stocks
— Fixed annuities
— Bank certificates of deposit
— High-yield savings accounts
— Balanced portfolio
Bonds
Take a look at fixed-income vehicles, where investment-grade corporate bonds maturing in three to five years now yield about 5.75%. “That’s nearly twice as high as the Federal Reserve estimates its key policy rate will average over the same four years,” says Steven Wieting, chief economist at Citi Global Wealth. “Hold-to-maturity bonds allow you to lock in higher rates for longer. For many U.S. investors, municipal bonds will also offer a higher effective yield once taxes are taken into account.”
U.S. Treasury yields are already falling from nearly two-decade highs, but Wieting is okay with that. “Extending the bond’s duration beyond Treasury bills can outlast any cuts in the Fed’s policy rate that might be coming in the next two years,” he says. “On average, since 1960, the Fed has kept its policy rate at its peak level for only seven months.”
Dividend Stocks
Dividend stocks are favored as low-risk investments for several reasons.
“Dividend-paying stocks, especially those from established companies, often provide a reliable source of income,” says Mike Darkowski, founder of Scrab.com, a Dubai-based data-driven stock-picking company. “These companies typically have a history of consistent dividend payments, offering stability even during market fluctuations. What’s more, they can act as a hedge against inflation.”
“As companies increase dividends over time, investors can benefit from rising income that helps offset the effects of inflation,” Darkowski notes.
Investing in dividend-paying stocks isn’t just about immediate income; it also involves the potential for capital appreciation. “Companies that consistently pay dividends often exhibit sound financial health, and their shares may appreciate over time, enhancing total returns,” he adds. “At the same time, if they are treated as the element of portfolio diversification, even if the market experiences downturns, the income from dividends can cushion losses, potentially providing a more stable investment journey.”
Utility Stocks
After the Fed indicated its more than two-year campaign of hiking interest rates could be over, utility and electric stocks could stand to benefit.
“My favorite low-risk investments include electric utilities,” says Steven C. Connors, founder of Connors Wealth Management in Scottsdale, Arizona. Electric utilities are tied to the long-term bond market, which can be quite risky, he says. Expected Fed rate cuts should tamp down that risk and boost utilities.
“We’re seeing a more positive tone lately as a result of softening incoming data in the U.S. economic front,” Connors says. “The Fed itself may not acknowledge lower rates, but in time they may come around to being open to modest rate cuts. Most of the potential gains come before or in anticipation of interest rates falling.”
“If the U.S. economy is heading back to the Fed’s 2% target for inflation, then now would be favorable timing for utility stocks,” he notes. “In addition to electric utilities, the wireless telecom stocks are also at big discounts to the S&P 500. There are a lot of negativities priced into these companies.”
Connors points to Verizon Communications Inc. (ticker: VZ), which is currently trading at about 8 times 2024 earnings estimates and pays a healthy 6.3% forward dividend yield. He also likes Reaves Utility Income Fund (UTG), a closed-end fund that pays approximately 8.7% with a monthly distribution of dividends.
[READ: 16 Things You Need to Know Now About Annuities.]
Fixed Annuities
One of the best strategies for generating low-risk cash flow in a volatile economy is a fixed index annuity.
Once an investor locks in the current rate on a specific income rider on a fixed index annuity, the insurance company must continue to pay that income even if interest rates move lower in the future, Connors points out.
Fixed index annuities, or FIAs, also guard against market losses, thereby maintaining your principal and providing a lifetime guarantee that the income will last as long as you do (or you and your spouse).
“There is some marginal upside to an annuity’s account value, too,” Connors adds. “Look at historical returns to see what’s possible. However, it is not in any way a guarantee like the amount of income a fixed annuity will provide you with each month and year.”
Fixed annuities are at a point where rates are artificially high, and the likelihood of the annuity providers keeping them this high will be short-lived.
“Conversely, think back to when mortgage rates were artificially low during the pandemic,” he says. “If you locked in your mortgage rate, you may feel like you’re quite fortunate. The antithesis could be the higher interest rate on the income-oriented FIAs. These shorter-term aberrations can work in your favor over the longer term.”
Just make sure the insurance company has a high credit rating from the major rating agencies, Connors says.
Bank Certificates of Deposit
Bank CDs are proving to be popular in early 2024, as savings rates rise and as long-term investors seek shelter from what they perceive to be high risk in stocks. CD rates of more than 5% are commonplace at banks and other financial institutions these days.
CIBC Bank USA, for example, is offering a 5.51% annual percentage rate, or APY, for a one-year CD with a $1,000 minimum deposit. Marcus by Goldman Sachs is currently offering a 14-month CD with a 5.4% APY and a $500 minimum deposit.
As with any investment, talking with a trusted money manager can help you select the CD that works best for your unique investment needs. That’s particularly the case with older investors.
“Say you’re within 10 years of retirement, for example, and trying to decide how much to keep in bank CDs. “In that scenario, I recommend having 18 to 24 months of ready cash in either high-yield savings or CDs as a starting point,” says Bradley Thompson, a financial planner with New Canaan Group in New York. “This can help ride out a life event or market drop at the wrong time. Beyond that, it’s tailored to the individual client and may be quite high or quite low depending on their overall risk tolerance.”
High-Yield Savings Accounts
With interest rates remaining historically high, some financial advisors are recommending a high-yield savings account tier for 2024 investment portfolios.
“The interest rate environment is attractive enough that these types of investments can earn meaningful interest with very limited risk,” says Chris Urban, founder of Discovery Wealth Planning in Vienna, Virginia. Rates on high-yield savings accounts, while variable, are currently above 4% at many banks.
“If you need access to your funds, then go with a high-yield savings account versus CDs,” Urban says. “While it depends on the size of the investment you’re making, the variable interest rate offered on a savings account with immediate access to cash is usually a better deal.”
Balanced Portfolio
Building a stable, balanced investment portfolio can also lower investment risk, wealth planning experts say.
“The biggest mistake that I see risk-averse investors make is not having a properly allocated portfolio,” says John Jones, investment advisor representative at Heritage Financial in Newberry, Florida. “There’s a sweet spot in an investor’s portfolio where you can preserve a portion of the portfolio against market fluctuation, and then stress and worry is not induced.”
For example, having a 60-40 portfolio (60% in stocks and 40% in bonds) has historically moderated risk in investment portfolios, while still offering a good opportunity for ample returns.
“Prospects for a balanced split of stock and bond investments has improved markedly since 2020 to 2021,” Wieting says. “In that period, interest rates were far too low to offset the risks of equities. This generated the largest loss for bond investors in history in 2022.”
Now, the over-valuation of the bond market is gone, in what economists are calling the Great Reset.
“This has impacted most equities negatively in both 2022 and 2023,” Wieting notes. “We believe returns for both asset classes over the next decade have improved considerably at today’s cheaper valuations. Consequently, the benefits of asset allocation should return.”
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Update 01/24/24: This story was previously published at an earlier date and has been updated with new information.
