In investing, there is one rule that supersedes all others.
And this rule should be the first thing you consider when building the core holdings in your portfolio.
Legendary investor Warren Buffett put it best:
“Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1.”
There is no sure thing in investing, and every investment comes with certain risks. However, today I would like to share with you five funds that I believe are some of the safest, most stable investments on the market.
But first, let’s take a look at the investment that most people consider the benchmark of safety: U.S. Treasury bonds.
Treasurys are considered the safest investments in the world because the U.S. government has never defaulted on any debt it has issued. For this reason, Treasurys serve as the benchmark when determining the amount of expected risk for other types of assets.
Today the yield on a 10-year Treasury is 2.6%. This is the benchmark we will use to compare each of the following funds.
While none of the funds we are going to look at could be considered as safe as Treasurys, I would argue that the increased risk is minimal. And the risk you take by investing in any of these funds is more than offset by what you stand to gain.
To properly analyze all five funds, this article will be divided into two parts. Today’s article will focus on one “economic moat” fund and two dividend growth funds. Part 2 will focus on two additional funds that take a slightly different approach.
iShares Trust (NYSE:HDV) tracks the Morningstar Dividend Yield Focus Index, which contains 75 U.S.-based firms screened for qualified dividends. (A qualified dividend is taxable as capital gains.) As a result, this fund does not invest in real estate investment trusts (REITs) or master limited partnerships (MLPs).
All companies in the fund must have a Morningstar Economic Moat Rating of narrow or wide. This focus on economic moats — referring to the sustainable competitive advantages enjoyed by some companies — helps ensure that only the safest, most stable companies make the cut.
StreetAuthority expert Elliott Gue made iShares Trust (NYSE:HDV) one of his top picks in his November 2012 issue of Top 10 Stocks. Here is what he had to say:
iShares Trust (NYSE:HDV) focuses on the market’s biggest dividend payers… but it also only invests in dividend-paying companies with economic moats, as determined by investment research firm Morningstar.
Furthermore, the fund uses Morningstar’s “Distance to Default,” a further measure of a businesses’ financial health. A dividend-paying company also has to rank in the top half of its peers in this measure to be included in the fund’s holdings.
From there, the fund weights the portfolio based on the total amount of dividends paid each year. So AT&T Inc. (NYSE:T) — which at $10.3 billion annually pays more in dividends than any other company in America — is weighted the heaviest.
Because of this, iShares Trust (NYSE:HDV) is weighted heavily toward its top holdings, which are larger companies that pay more in dividends. The top 10 holdings make up more than 60% of the portfolio and have a larger influence on the fund’s returns than the rest of the portfolio.
Now, blue-chip stalwarts like AT&T Inc. (NYSE:T) aren’t the sort of companies that are going to make you rich overnight. But that’s not the point. What we are looking for here are super-safe investments that can still offer you a better rate of return than Treasurys or a simple fund that tracks an entire index like the S&P 500.
iShares Trust (NYSE:HDV) invests in the types of companies that can grow your wealth over time while paying you a steadily rising stream of income. And since its inception in 2011, the fund has done exactly that: