Low Risk Income Alternatives to CD's (stocks, p2p lending etc)

Low Risk Income Alternatives to CD's (stocks, p2p lending etc)
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I think with the possibility of the upcoming “interest rate drought” some discussion as to safe as possible alternatives may be in order.

One of the most commonly used is to invest in stocks that pay a dividend. Now there isn’t any FDIC insurance here so we want to minimize the risk to our investment as much as possible. That being said how about 8 stocks that have paid their dividend for 125+ years? That sounds pretty reliable to me. The motley fool site provides a lot of really good information on stocks/investing. You can read other articles to get additional stocks that may be a good fit. They have subscription services which will even suggest what stocks you should purchase at the current “time” to aim at beating the stock market.

Normally stock trades would cost you money per each trade but both robinhood.com and firsttrade.com are brokerages that offer FREE trades of stocks and ETF’s. Firsttrade also offers free trades of mutual funds. Using services like this lets you minimize the overall cost by letting you buy into these stocks whenever you want to or even on a planned schedule. The one risk that cannot be eliminated is that a stock price can rise and lower over time but if you have no plans to sell it and are primarily interested in the dividend it becomes less of an issue. For those that want to be able to setup a schedule of x dollars every week/month etc without dealing with individual stocks maybe a company like m1finance.com might be of more use. It’s a “robo-advisor” that lets you setup your own custom portfolio’s/percentages and then as you contribute cash it makes the purchases in the appropriate percentages. One catch here is m1finance makes purchases one time a day (10-11am EST) so if you put in money after that it won’t actually make the purchase till the next day but it allows for “partial shares” where buying the stocks directly requires having enough to purchase an even share. m1finance is also “no fee”.

In the past many people were fond of dividend re-investment programs(or DRIP plans) to buy more of a particular stock. It let them spread the cost of the purchase across all the people purchasing at that time and could lower costs however now that we have brokerages offering free trades THAT becomes the more attractive option and allows more flexibility.

I should also mention that qualified dividends are taxed significantly lower than interest income. You can read up more on that here: https://smartasset.com/taxes/dividend-tax-rate. What makes them qualified? Basically it’s a USA stock and you owned it for 60 days previous to the ex-dividend date (the cutoff date for when the next dividend will be paid out). Dividends can be paid out Monthly, Quarterly or Annually depending on the stock or fund.

I’ll end here for now and if something wasn’t clear feel free to ask for a follow up.

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Minimum Risk Income Generators

  1. Dividend Aristocrat (Raised the dividend every year for 25+ years) stocks. Current list: https://www.suredividend.com/dividend-aristocrats-list/
  2. Peer to Peer Lending Sites. Initial discussion here.

I think other smarter people will attack some of your assumptions on the actual strategy, but I would add my two thoughts:

Stay away from DRIPs in all but tax advantaged accounts, the complexity upon sale can be a major pain.

When trades are free as opposed to $5/trade, you’re paying for it in some other way - from no customer service to kickbacks to brokers for routing orders a certain way (sometimes to a trader’s disadvantage), etc.

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Oh I’m quite sure. That’s why I’m directing folks to the motley fool article. They can argue with them. I’m just listing some strategies to look at when cd’s are going to be earning next to nothing. If your money is sitting in a bank account earning less than 3% interest it’s not even keeping up with the expected inflation rates. I also hope other people will contribute their thoughts. I just wanted to get the topic started since discussing it was frowned on in the bank threads.

Another strategy for generating income is Peer to Peer Lending sites. At these sites as a lender to take the exact same position a bank would with the same possible risks of defaults, late payments etc however the actual site manages everything including writing off notes, collecting late fee’s etc. You earn a percentage based on the category of note. The riskier notes obviously provide higher returns. The safe bet in most cases is to let the site “build” a portfolio of notes where you have a good blend that minimizes your risks while offering a good return. 6 of the top sites are mentioned here: https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp

I personally did a test with Lendingclub.com. I could not use some sites because they were not available to my state. In the normal operation they will recommend you let the money from paid off notes purchase more notes to keep the ball rolling. I tested this initially then set my account to not purchase any new blocks (a note at Lendingclub gets broken up into $25 blocks and hundreds of people may have blocks from the same note. This minimizes the risk of 1 note sending you into the hole.) and just let the funds build till I moved them to my checking. Over a 2 year run the money invested returned 4.79% which is pretty good. This return is AFTER all write-off’s of bad notes and would be higher if I was reinvesting the proceeds. You have the option to sell your notes in a “marketplace” but you won’t get full value so if you use these sites you have to be prepared to lives off the “income” and let the initial investment ride till the notes they are tied to eventually pay off or get written off.

Finally the sites typically grade a note from A to F with F being the most risky. You would think if you stuck to all A and B notes you’d have very little write-off but truthfully I had notes from A to F that went both ways. There are people that hand review each note they choose to invest in but I had good results just letting it pick choices.

This option just like the first one is not for everybody. Hopefully it’s useful to someone. The actual breakdown for my test was as follows (even though it looks like I still have 50% or so of my blocks most of those have little left of the $25 that hasn’t been paid off so 100 blocks in this case is closer to $100 vs $2500.

[ My Notes at-a-Glance 621 ]

    • Not Yet Issued ![?][ 0 ]

    • Issued & Current ![?][ 251 ]

    • In Grace Period ![?][ 5 ]

    • Fully Paid ![?][ 292 ]

    • Late 16 - 30 Days ![?][ 1 ]

    • Late 31 - 120 Days ![?][ 3 ]

    • Default ![?][ 1 ]

    • Charged Off ![?][ 68 ]

Since when are stocks considered a low risk alternative to CDs?

The stock market is near all-time highs, dividend yields are near all-time lows, and one of the drivers is a drunk. IMO it’s a bad time to invest in dividend-paying stocks, because the risk of losing principal is not low.

You’d probably do better with fixed rate and term bonds from those same stable companies, assuming they issue bonds.

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I didn’t say ALL stocks were low risk. I stated Dividend Aristocrats which have increased their dividend for 25+ years were and pointed directly to an article covering 8 stocks that have paid their dividend consistently for 125+ years. Motley fool has an excellent track record when it comes to beating the market. The majority of those stocks tend to stay around the same price as well but it’s pretty easy to tell if you are close to the 52 week high or not. While dividends may be “low” compared to in the past there are still plenty that match the criteria I listed that still pay 3-6% in dividends. AT&T is one i can think of just off the top of my head.

Famewolf excellent thread.

OK, I get that the dividends are, for all practical purposes, inviolate. I’m willing to take that as a given. And presumably, as well, the rate of return compares favorably to APYs on CDs.

But what about your principal? Is not the principal value of these investments threatened by down (stock) markets? I assume you are investing in this manner and have met with favorable outcomes. Of course recently the stock market has been quite strong. Are threats from a down market somehow mitigated by the folks running these investments? How did these things perform back during the 2008 crash?

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I’ve no intent here to drive this thread off topic. I’m going with famewolf’s title where he says “low risk alternatives to CDs”, and also where it says “etc”. Famewolf, if I’m off topic tell me and I will cease such posting as this instantly. Until then:

As a low risk alternative to CD investing I would suggest looking at bonds, including munis, govvies, and corporate paper.

Q: Uh, shin: hate to tell you but bond yields are falling fast, with some govvies already near all time low yields. You really cannot be serious about buying bonds. Right?

I certainly am serious. You have to pick and choose. You have to shop. Back in my bond buying days I bought cats and dogs, I bought callable paper I had studied and thought would be called, I bought special situations, and yes, I even considered stuff rated below “trip trip”.

Q: That was then, this is now. And besides, you cannot put away large chunks of money on the basis you are describing. Are you willing to concede you’re full of prunes?

OK, I’m willing to concede things are different now than back when I was doing bonds. And, yes, cats and dogs are a tough find when you have hundreds of thousands to invest. But still:

I believe time spent on bond research is more productive than the same time devoted to researching stocks or investment products built around stocks. Of course you have to learn the marketplace. This happens over time. I spent many years and made my investment success with bonds, especially munis. There is money to be made and, in the spirit of this thread, risks can be minimized. There is even bond insurance, though careful research must be done to ensure the insurance you purchase is reliable.

Q: What about bond funds? Do you like those?

I detest bond funds and never have used them. You lose control of your investments that way. Someone else will have to tout bond funds. It never will be me. I always bought individual bonds following careful consideration and research. I never lost a dime, either, but I made pretty good money that way.

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I’ve spent most of the past 15 years buying individual bonds, both corporate and muni. Lately I’ve been transitioning to ETFs to reduce the tax prep complexity and research required when having to continually reinvest new money. I don’t reinvest any dividends. I prefer to take them in cash and decide for myself when and what to reinvest in. I, too, have made a lot of money in individual bonds, not the least of which is a steady income stream that increases year after year. I have the same intent with my new investments in ETFs. Most of my ETF choices are with SPDR, iShares, and Invesco. Many are commission-free at brokerages. Both individual issues and funds have their pros and cons. I hold a few baby bonds, which can be found using a preferred stock screener at Schwab. Coupons are usually higher than corporate bonds.

In the spirit of the intent of the OP, ETFs or mutual funds that have a focus on fixed income, or a high dividend stock yield, are among my choices. The most conservative would start with the MMFs, of course. Then investment grade bonds in all categories, starting with ultra-short (very little price fluctuation), short, intermediate, long-term (my personal preference), or a core bond fund with an even spread among the various maturities. I do invest in high yield bond ETFs that are among the more conservative of the group.

Next comes preferred stock. PSK and PFF are a couple of good choices in ETFs. Then comes stock ETFs with a focus on higher current dividends, like SPYD, which has some REITs and utilities, but isn’t narrowly focused among just those 2 sectors. If you’re interested in Dividend Aristocrats, I’m sure there are ETFs for those as well.

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I thought it worth mentioning that vanguard’s dividend appreciation fund recently reopened after being closed since 2016.

https://www.bizjournals.com/philadelphia/news/2019/08/02/vanguard-reopens-actively-managed-fund-expands.html

Principle is less of an issue if you 1) avoid buying when it’s at the 52 week high and 2) intend to hold it for long periods of time (by which I mean 3+ years and leaning hard on the +). This is intended to generate a consistent income stream. No the threat of temporary downturns of your principle cannot be eliminated but it can be mitigated as much as possible. The blue chips in question also tend to fluctuate a lot less than other stocks just because their dividend is so stable. Take a look at any of the Dividend aristocrats. I looked at Mcdonald’s and it’s pretty much a slow line upward over last 3 years in stock price.

I’ve used the aristocrats and sometimes stocks that have not made the 25 year cut to provide a supplemental income for the last 15 years. All of the stock’s I purchased are now worth considerably more than I paid for even though they at times had temporary losses to their principal ON PAPER. It’s never actually lost till you sell it.

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The list of long-time dividend paying stocks is full of mostly recession-proof stocks like utilities or staples. People will still need water, power, and basic necessities so they should keep paying dividends no matter what. There is a short-term risk for holding those through a recession but it’s not that important as long as you don’t sell and they keep paying dividends. All things being equal in terms of performance vs. market, their trajectory should recover upwards once the markets recover. There’s a risk that the dividend-paying companies could also become poorly managed and stop paying dividends but I guess this is where some diversification would help smooth the bumps. Still it’s a risk that does not exist with CDs.

The taxation aspects gets lost too many times but to me it’s variable. Outside of the $200 bracket around $79k income where you’d pay 3% more capital gains than income tax, most would save 7-20% tax on qualified dividends vs. interest income. That bumps the effective returns of dividends stocks significantly.

As far as P2P lending, I must admit I’m very ignorant because I’ve not looked at it seriously. Maybe I’m biased in thinking that the majority of people cannot handle their finances decently so I expect most to default. Anyway, my likely-erroneous pre-conceptions aside, what’s the track record for P2P lending during recessions? Specifically, while returns in market expansion years were likely good enough for P2P lending, how were those returns through say the 2007-2010 period?

I can’t speak firsthand since the company I tested it with(Lending Club) was founded in 2007 with their IPO being in 2010. Prosper was the first peer to peer lending group but they all were having growing pains around the time of the last recession. I was unable to use prosper as they had no support for my state. I would encourage folks to do a test drive with a smaller amount of money before dumping large amounts of cash into them.

With the way things look on the horizon we may very well get to see how p2p lending does in a recession soon. That’s not something I’m happy about. Of the two I much prefer the dividend aristocrat’s.

Shandril, do you by chance know how to calculate the actual rate of return factoring in the tax savings? I did some searches but couldn’t find it. ie a stock paying a 2% dividend isn’t really 2% if you are taxed 15% less on it than the equivalent funds in interest income.

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Well that’d depend on tax bracket. Qualified dividends get taxed at the rate of long-term capital gain distributions so either 0% (for low MAGI), 15% for most middle MAGI, or 20% for high MAGI. The most likely scenario (maybe not here though) is people with MAGI of $78-$169k getting taxed 22% marginal rate for ordinary income (and CD interest). For them, the capital gains are taxed at 15%. Same 15% rate with people in the 24% marginal rate in the next bracket up to $321k MAGI. So you’re looking at straight 7% or 9% difference in after tax rate of return.

In this scenario, a 2%, CDs yields 1.56/1.52% after tax while 2% dividends would yield 1.7% after tax. If you wanted to turn this around a bit, a 2% CD would compete with 1.84%/1.79% dividends. Similarly a 3.5% CD would yield the same after tax as 3.2%/3.1% dividends returns.

All those differences are within the ballpark of where people typically decide to switch one CD rate for another.

Obviously, this does not take into account any stock price fluctuations for actual returns but like you pointed out those are only paper gains/losses until you sell. But it does influence a bit when you decide to jump in.

The assumption here is that the underlying value doesnt really matter. A $100 stock paying 4% is paying $4, whether that share price goes up to $120 or down to $80; you’re still getting the same annual return on what you’ve invested. The primary concern is that the dividend remains constant.

With no defined “maturity date”, ongoing principle value isnt relevant. A declining stock price is in effect nothing more than an early termination penalty. Obviously you’ll want to get out at some point, but that point is solely at your own discretion and thus can adapt to any swings in underlying value.

That said, it wasnt too long ago that GE was considered one of those “dividend aristocrats”…

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The other caveat is that many of the “dividend aristocrats” are pretty well known and dividend yields are only around 2%. Pretty stable if you look at trailing/forward and 5-yr dividends… So even after tax, you’re not getting much dividend yield and with prices near all time highs, not likely to make much in valuation if jumping in now.

But it’s certainly an alternative if CD rates keep going lower. If recession hits within the next year and Fed lower rates back to near 0-0.5%, 2% dividends will be pretty popular…

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You got rid of your suggested stocks? I was going to add ABBV, BNS, F, VLO which have been recent Motley Fool suggestion and are not on their 52 week high with very attractive dividends.

Glad the original got sent to my email then. :wink: I liked several of your picks although at&t was already a pick of mine. I started a portfolio on m1 finance with 10 dividend stocks.

ABBV AbbVie Inc.: 6.80%



BNS Bank Nova Scotia Halifax Pfd 3: 5.24%
http://www.gurufocus.com/news/906837/6-stocks-with-low-pricesales-ratios
http://www.gurufocus.com/news/898561/3-largecap-stocks-with-a-high-earnings-yield

C Citigroup Inc.: 3.33%



D Dominion Energy Inc.: 4.76%
http://www.zacks.com/stock/news/472426/3-high-yielding-utilities-to-hedge-your-volatile-portfolio


F Ford Motor Company: 6.77%


GIS General Mills Inc.: 3.61%



HCP HCP Inc.: 4.32%


http://www.zacks.com/stock/news/456682/hcp-surpasses-q2-ffo-revenue-estimates-raises-outlook
http://www.gurufocus.com/news/901190/5-companies-boosting-earnings

KMI Kinder Morgan Inc.: 5.03%



T AT&T: 5.94%



https://seekingalpha.com/article/4285459-ts-advertising-business-extremely-underestimated

VLO Valero Energy Corporation: 4.69%
https://247wallst.com/investing/2019/08/15/goldman-sachs-has-5-dividend-growth-stocks-for-nervous-investors/

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the U.S. 30-year bond yield fell to a record low early Wednesday, dropping down to 2.105% for the first time ever.

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