Where Else To Invest For Safety And Income

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Fixed-income investments like bonds have been a popular investment option for generations. After all, the idea of earning reliable, safe passive income is quite enticing.

However, bond yields aren’t what they used to be. And with inflation on the rise, fixed-income investments like bonds aren’t nearly as attractive for investors. So, how can you put your money to work and generate meaningful returns without taking on much risk?

Thankfully, there are numerous bond alternatives investors can turn to. And the best part is that many alternatives to bonds still provide reliable income and have much higher returns.

Why Move Away From Bonds?

Bonds used to be an investment vehicle people could plan their retirements with. But these days, government and corporate bonds aren’t holding up nearly as well. Here are some of the factors at play:

  • Low Yield: Many government bonds are barely paying half a percent, and even 10- and 30-year government bonds have low yields. Corporate bonds typically have higher yields, but the extra risk doesn’t justify earning a slightly higher yield that’s still lackluster.
  • Inflation Risks: U.S. inflation rose 6.8% in 2021, which is the highest rise in decades. Locking your money up in bonds is worse during periods of high inflation because your investment actually loses value when yield doesn’t outpace annual inflation.
  • Opportunity Cost: When you invest in bonds, you’re taking on the opportunity cost of not investing in higher-paying assets.

Long story short, bonds aren’t very enticing right now.

Even Warren Buffett isn’t impressed. In his 2020 Berkshire Hathaway shareholder letter, Buffett states “Bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at year end – had fallen 94% from the 15.8% yield available in September 1981?”

When you look at these historical trends, it’s pretty clear why bonds have lost their appeal to Buffett and scores of other savvy investors.

The Best Bond Alternatives To Invest In

Bonds may not be a wise investment right now. However, there are still various fixed-income investments and other less risky investments that still generate meaningful returns. Here are nine bond alternatives to consider.

1. Real Estate Investment Trusts (REITs)

Real estate investment trusts, or REITs, are companies that own or operate income-generating real estate. Usually, these properties are assets like multi-family homes and corporate real estate.

REITs typically generate income from rent and are also legally obligated to pay at least 90% of taxable income in dividends to shareholders. This reliable dividend payment structure is why REITs are one of the best bond alternatives.

There are several different types of REITs out there, including:

  • Healthcare REITs
  • Mortgage REITs
  • Office REITs
  • Retail REITs
  • Residential REITs

You can likely find individual REITs or real estate mutual funds that mostly invest in REITs with your online stock broker or though your bank. Real estate mutual funds are a quick way to diversify your portfolio with multiple holdings, but you can also research individual REITs to invest in.

And, since many REITs are publicly traded like stocks, liquidity isn’t usually a risk. This means you get reliable dividend income but don’t have to lock your money up like you do with bonds.

2. Real Estate Crowdfunding Companies

Like REITs, real estate crowdfunding is another way to add real estate to your portfolio without needing a lot of upfront capital.

Real estate crowdfunding involves gathering money from investors and buying real estate properties. Typically, this also means buying income-generating real estate like multi-family homes and office buildings.

Companies like Fundrise let you invest in real estate properties with as little as $10. This low investment requirement means you don’t need to be an accredited investor to get in on the action.

Plus, Fundrise is fairly affordable in terms of fees in the real estate world. Investors pay 1% annually in fees, and historically, Fundrise has returned around 8% annually.

Overall, real estate crowdfunding is another excellent bond alternative, especially because you don’t need much capital to start.

Just note that real estate crowdfunding is typically less liquid than REITs or regular stocks. To access the cash value of your shares, you’ll need to sell them to other investors or back to the crowdfunding company, both of which takes time.

3. Preferred Stocks

Preferred stocks are stocks that pay shareholders a regular dividend and also get payment priority over common stocks. If you own preferred stocks, you also receive payment before common stockholders in the event of bankruptcy or mergers.

In other words, preferred stocks are a hybrid investment that’s similar to bonds and stocks. Preferred stocks typically pay higher dividends than common stocks so you generate more fixed income. But there’s also appreciation potential since you own equity in the company.

Many preferred stocks also have a callability feature that lets you redeem your shares at a predetermined call price. Callability plus priority payments make preferred stocks slightly safer investments.

The downsides of preferred stocks are that you don’t have voting rights in the company and shares generally have less room for appreciation.

However, if you want a sweet middleground between stocks and bonds, preferred stocks are worth considering. You can buy individual preferred stocks or even invest in ETFs like the iShares Preferred and Income Securities ETF if you want exposure to dozens of different companies across multiple sectors

4. Dividend Stocks

Another popular alternative to bonds is to invest in dividend-paying stocks. In some sense, dividend stocks get you the best of both worlds. You get regular dividend income and you can also invest with some long-term growth in mind.

Granted, dividend stocks don’t have nearly as much appreciation potential as growth stocks. However, if you want to add stocks to your portfolio and diversify your income, this is the strategy for you.

A great place to begin your research is to look at dividend aristocrats. These aristocrats are companies in the S&P 500 that have increased and paid dividends every year for the last 25 consecutive years. Currently, there are over 60 companies that boast this title, including names like:

  • AT&T Inc (NYSE:T)
  • Chevron (NYSE:CVX)
  • Lowe’s (NYSE:LOW)
  • McDonald’s (NYSE:MCD)
  • Target (NYSE:TGT)
  • Walmart (NYSE:WMT)

Of course, you can look for other dividend-paying stocks as well. Many companies pay dividends but haven’t been around long enough to make the dividend aristocrat list.

Commission-free brokers like M1 Finance and eToro let you invest in dividend-paying stocks for free. You can also invest through your bank.

Whatever route you choose, dividend investing is a reliable way to earn more passive income, and the returns certainly outperform bonds these days.

5. Fixed Annuities

Fixed annuities and bonds are both safe investments investors use to guarantee income. The main difference is that fixed annuities are a type of insurance you purchase that pay a certain amount of interest over a given period of time.

People often buy fixed annuities for life as they enter retirement. You can buy variable annuities that pay various interest rates depending on how well the fund is doing. Alternatively, you can buy fixed annuities that have a set payment schedule and interest rate for even more security.

The appeal of annuities is that you’re getting fixed income for the rest of your life. Plus, your money can grow tax free and you’re only taxed when you withdraw money.

Annuities typically have high fees, which is one of the main drawbacks. According to Annuity.org, variable annuities typically charge 2.3% in fees but can charge 3% or more. Fixed annuities may have lower fees because they’re simpler, but you’re still going to pay more than your average ETF.

If you’re curious about buying annuities, you can check out marketplaces like Blueprint Income and annuity providers like AgeUp.

6. High-Yield Savings Accounts

High-yield savings accounts are another reliable bond alternative that keeps things simple. Currently, there are plenty of high-yield savings accounts that pay 0.40% to 0.60% APY or more.

This doesn’t outpace inflation. But compared to the average savings account interest rate of around 0.06%, high-yield savings accounts are superior.

Plus, many leading high-yield savings accounts pay welcome bonuses of $100 to $250 for opening an account and making a qualifying deposit. You can read our list of the best high-yield savings accounts for a current list of rates and bonuses. Some of our favorites include:

Since inflation outpaces high-yield savings accounts, this isn’t an ideal long-term investment. But if you need somewhere to park your spare cash or emergency fund without tying it up in an investment, these accounts are for you.

8. Real Estate Debt

When people think about real estate investing, equity investing is usually what comes to mind. However, investing in real estate debt can be just as lucrative, and you don’t need much capital to start.

For example, companies like Groundfloor let you invest in short-term, high-yield real estate debt investments. You only need $10 to begin investing, and according to Groundfloor, investors have generated 10.5% actual returns to date.

The Groundfloor marketplace lets you browse ongoing real estate projects you can invest in. Groundfloor outlines the interest rate, loan term, and loan-to-ARV ratio which helps explain the value of the loan to the future value of the real estate project. You can invest in as many loans as you like and you fund your Groundfloor account with money from your bank account.

Most Groundfloor loans are between 6 to 9 months. Loans are certainly riskier than investing in bonds. However, because Groundfloor only requires $10 to invest, you can diversify your loan portfolio with many loans. This reduces the risk a single default drains your investment, making Groundfloor less risky than meets the eye.

Groundfloor also attempts to recoup money through foreclosure if borrowers default. However, you should still consider your level of risk tolerance before pursuing this alternative to bonds.

9. Worthy Bonds

If you found a bond that paid 5% annually and compounded daily, you’d probably be surprised given how low bond yields are these days.

But with Worthy, that’s exactly what you get: a 5% fixed-income investment that only takes $10 to start investing.

Here’s how Worthy works:

  • Investors buy “bonds” from Worthy starting as low as $10
  • Worthy lends out money to American businesses as loans
  • Worthy earns interest on these loan payments
  • Original investors get 5% in fixed interest that compounds daily

What really sets Worthy apart from normal bonds is that you can cash out your holdings anytime without paying fees. And, since Worthy doesn’t charge account fees, this is basically a 5% savings account you can use to diversify your portfolio.

Note that Worthy isn’t FDIC-insured. Plus, since Worthy loans money, there is a risk companies default on payments if they go bankrupt.

Worthy mitigates some risk by backing bonds with assets from businesses it loans money to. Theoretically, this means Worthy can liquidate assets to cover losses. But it’s unclear what might happen if many Worthy borrowers default simultaneously.

Ultimately, Worthy carries more risk than government bonds. But if you want a reliable 5% fixed-income investment that’s much more liquid, Worthy is for you.

What To Consider When Choosing Bond Alternatives?

Now that you know some of the best bond alternatives to invest in, here are a few more factors you should consider before choosing your investment.

Risk Versus Reward

Safe investments like bonds typically have lower returns in exchange for security. This is why it’s important to know your level of risk tolerance as an investor.

Plenty of bond alternatives have slightly more risk for more returns. Furthermore, investing in assets like dividend stocks or ETFs add volatility to the mix that you have to learn to stomach.

Ultimately, diversification is your friend here. You can park some money in safer investment vehicles like a high-yield savings account or dividend-paying stocks while still investing in more lucrative assets like stocks, real estate, or even cryptocurrencies.

Funding Requirements

Many bond alternatives don’t require much starting capital. However, certain REITs and crowdfunding companies require being an accredited investor. Similarly, earning meaningful returns from dividend-paying stocks usually means having a sizable portfolio.

Every investor has to start somewhere, so don’t worry about only buying one share of a certain stock or investing with Fundrise with just $10. However, know that growing your wealth takes time.

Liquidity

One downside of bonds is that they’re fairly illiquid. And while you can usually sell bonds before maturation, you’re likely to face penalties for early exchange.

If you’re investing for the short-term, you need to invest in highly liquid assets so you can sell off your investments and access capital when you need it. This is why high-yield savings accounts and companies like Worthy are popular.

In contrast, liquidity isn’t as important for long-term investments. So, before investing, know how much of your capital is for your long-term nest egg and what percentage you might need within the next few months or years.

Frequently Asked Questions

Let’s answer some of the most common questions that people ask about bond alternatives:

Are bonds a safe investment?

Yes, bonds are generally considered to be some of the safest investments, especially government bonds. However, bonds aren’t a great investment right now because inflation is outpacing bond yields.

Are CDs better than bonds?

Certificate of deposits (CDs) are often compared to bonds because both investments are safe and provided fixed income. The main difference is that CDs are issued by banks and credit unions.

However, like bonds, CDs aren’t a smart investment right now because of inflation. The best CD rates are paying around 0.50% to 0.65% APY right now. You might as well use a high-yield savings account instead if you want security and liquidity.

What is safer than bonds?

CDs are just as safe as bonds because they are FDIC-insured. Similarly, money you deposit in a high-yield savings account is also FDIC-insured, making these two strategies incredibly safe investments.

That said, you should always consider the risk of inflation and opportunity cost of staying so safe. Putting money you need in the near future in safe investments is smart. But for long-term investing, taking on more risk for a higher return is likely worthwhile.

Is gold a good alternative to bonds?

Yes and no. It’s true that gold has, at times, acted as an inflation hedge. However, unlike bonds, gold investments don’t typically pay regular income.

Methodology

The College Investor is dedicated to helping you make informed decisions around financial topics like how to invest your money. To accomplish this goal, we provide a list of popular investing strategies and outline which strategies suit different investing goals and level of risk tolerance.

For the best bond alternatives, we’ve chosen strategies that either have similar levels of investment security or options that are more growth-focused. We also consider factors like investing fees, complexity, liquidity, and numerous other criteria to pick the best options. We believe that this list of bond alternatives provides a diverse range of investing options that are ultimately better than bond investing.

Final Thoughts

Any investment is going to have a certain risk versus reward ratio. And when picking a bond alternative to invest in, it’s important to keep this ratio in mind.

Bonds have historically been popular because they’re safe and predictable. If you need this sort of investing strategy for later stages of life, safe options like annuities and dividend-paying stocks could be for you. In contrast, if you have a longer investing timeframe, taking on more risk for more growth potential usually makes sense.

There are so many ways to put your money to work for you. The main thing is to start and remain consistent so you can build a nest egg that will serve you for the rest of your life.