When people think of growing their money as safely as possible, they often first look at bank certificate of deposit (CD) interest rates. This is a tried-and-true method for growing your money slowly overtime, with annual yields that may be as high as 5% for a 5-year CD.
There is another low-risk option, if you are an investor who is going to stick with the plan over the long term. This option, which may grow money faster than a CD, is through stocks and equities with stable share values but also provide solid dividends.
A Comparison Example Over 5 Years or 20 Years
Consider an investment of $100,000. With a 5-year CD with an annual, compounded yield of 5%, the total principal value after 5 years would be $127,628. Assuming the deposit account was FDIC-insured, your risk is nearly zero. If you roll the amounts over into these CDs for 20 years, the total value of the account would be $265,330.
Now let’s compare it to the performance of a hypothetical dividend-bearing stock. If we assume an average annual share growth of 7%, with annual 2% dividends that are reinvested into the principal, the 5-year total would be $153,862. After 20 years at that same average 7% growth, the ending value would be $560,440. That’s more than double the performance of the CD.
An important key to remember in these examples is that over the short term, depending on the stock or equity chosen, there will be a greater risk of volatility (though the dividend payment will offset some potential losses). Over the long term, of 5 years or more, stock growth historically averages around 7%. Long-term CD rates though, especially over the past 10 years, have rarely reached 5%.
In fact, if you put your money into the 5% CD, that bank will generally invest your CD dollars in these very high-dividend paying stocks, thereby earning their profit. We generally advise our clients to consider these higher-dividend paying equities in place of CDs, if the client is looking down the road and investing for the longer term.
Generating Income With Dividends
Some stocks will pay substantially higher annual dividends than 1.5%–2%, especially in industries with larger cash flows, like the energy, real estate, and insurance sectors. This approach can also be useful in generating income for older investors. Stable stocks with high quarterly dividends can contribute significant income on top of their Social Security or other fixed income sources.
One of our clients had a business with excess cash sitting in a business checking account, which was earning no interest. He sought a safe, liquid means of putting this sum to work. We established a portfolio of high-dividend stocks with stable share values that pays roughly 4.5% in dividends.
At Isakov Planning Group, we emphasize that your level of investment and type of investments must align with the amount of risk that you’re willing to accept and on your long-term financial goals. Contact us today to see how this approach can be applied to your specific circumstances.