Investors who chase yield want to know where they can find the safest investments with the highest returns.

Chasing yield is not at all a new process to the markets. With interest rates now at record lows going all the way out to 30-years, safe investments with high returns are almost laughable. How can investors protect their capital, enjoy safety, but also bring home some cash flow? We’ll try to answer.

Dividends Safe, Moderate Returns

Dividend investing has its benefits, mostly that dividend-paying stocks have long been one of the best investments on the market. Dividend-paying stocks can also be purchased through an exchange-traded fund like SDY, an ETF based around the 50 highest-yielding SP 500 index components.

Dividend stocks are a safe investment with high returns for the following reasons:

1. Dividends support share prices – Dividend yield have to be treated like any other cash flow to investors. Since many dividend stocks yield as much as the 30 year Treasury bond, investors see a dividend paying stock as a good source of long-term cash flow. Naturally, share prices do not fall as far during an economic contraction, since the dividend yields keeps stock prices higher.

2. Dividends are consistent – Many SP500 components simply don’t have the ability to reinvest in their company. Instead, their earnings are distributed to investors through a dividend payment, which keeps investors in the stock. Consistency is the key for any investment, and companies are usually very slow to change their dividend policies.

3. High returns – The upside for dividend paying stock is just as large as any other company. Multiple expansion will provide for the stock to gain in value against its earnings. Also, economic growth will naturally be a boon for any company, even if its customers are very broad-based.

Safe Investments in Cash

There are also safe investments in cash, but there is no such thing as a safe investment with high returns in cash. The simple fact of the matter is that the Federal Reserve aims to keep interest rates low, thus reducing possible returns on cash holdings.

Furthermore, cash is affected by inflation, which, despite being very low, is still enough to reduce returns to almost nothing. If you have cash invested in a vehicle posting 2% annual returns and inflation runs at 1.5%, your real rate of return is only .5% per year—a pittance compared to the real rate of return of 1.5% for dividend stocks.

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