Blog Investing 5 compound interest investments with better returns 2021

5 compound interest investments with better returns 2021

date December 3, 2020 time 6 min read 2756 views

Whether you are a beginner investor looking to start strong and earn more or a soon-to-be retiree looking to squeeze a bit of extra income before retirement, compound interest investments can provide the breakthrough you need. In this article, we’ll discuss 5 compound interest investment opportunities, a few strategies on how you can invest in them, and their pros and cons.

Would you rather earn $0.0001 compounded daily by double for 30 days or receive $1,000 daily for the next 30 days?

If you picked the second one, you may have fallen for the instant cash appeal and we don’t blame you. It looks better on paper.

But here is a sneak peek of what you would earn in 30 days if you choose the compounding option:

Hypothetical case of 30-day $0.0001 invested with compound interest
Hypothetical case of 30-day $0.0001 invested with compound interest

That’s an impressive $53,687.0912 in 30 days from just $0.0001. When done right, compounding can make you rich, and we’re going to walk you through a bit about how to do it.

How to invest with compound interest: 5 factors to consider

Not every compound interest investment option will work for you. 

Here are four major factors to consider before you throw your money in an investment: 

  • When you need to access your money – If you want to access your money more often, choose investments that let you withdraw funds without restrictions, fees, or penalties. Compound interest only becomes effective over a long period.
  • Goals – Want to invest and buy a house in 3 years? You need an investment that can provide a stable income (less volatility).
  • The minimum investment required – Some platforms require you to invest a minimum amount. Check that!
  • To earn the best rates in compound interest investments, go for portfolios that:
  • Provide rates above inflation (more than 2%)
  • have a higher frequency of compounding

Ready to make more money? Here are 5 compound interest investment options you can consider:

1. Dividend ETFs (Exchange Traded Funds)

Pros 

  • More tax-efficient than other index funds.
  • They trade all day so you can cash out easily.
  • You pay no fees as they are passively managed.

Cons

  • Earnings can be somewhat volatile. They rise and fall with the performance of the sector they cover.

Investing in the stock market is one of the oldest ways to earn compounded interest. Warren Buffet is famous for turning $114.75 in 1945 into over $400,000 in 2018 through stocks.

While individual stocks are volatile, ETFs are extremely diversified and mitigate a lot of the volatility of the markets. This is because they are a full portfolio of stocks covering a specific market sector. Recently, dividend ETFs full of dividend-earning stocks have become a popular way to earn steady compounded income.

When you buy a dividend ETF, you receive dividend payments either monthly or quarterly.  You can then reinvest the dividends to benefit from the compounding effect.

VanEck Vectors Fallen Angel High Yield Bond ETF (NYSE: ANGL),  for example, is a bond index ETF that managed to pay a dividend of 4.48% on September 8th and 5.13% on October 7th.

If you had just $10,000 in VanEck you’d have made around $500 in cash both months regardless of market movement.

Strategy 

ETFs are generally a long-term investment strategy. While their diversification makes them less volatile, they often earn slowly. Choose ETFs that pay dividends monthly and reinvest dividends for a compounding effect

2. Roth IRA (Individual Retirement Account)

Pros 

  • Interest compounds annually.
  • Taxed before investment, not after. If you start early, you can withdraw years of compound interest with no capital gains tax.

Cons  

  • Restrictive for people with too much income. The maximum annual contribution in 2020 is $6,000 or $7,000 if you are 50 years or older.
  • If you withdraw funds before you are 59 and 1/2, you’ll pay tax and penalties on earnings 
  • Brokers charge you annual management fees (about 0.25% per year)

No matter how old you are, you should probably be saving for retirement. The earlier you start, the more money you will have when you finally want to (or need to) stop working. 

A Roth IRA is a retirement account where you make after-tax deposits and enjoy tax-free withdrawals upon retirement when you are at least 59½ years old.

A Roth IRA is one of the best compound interest investments you can make. 

How to invest in Roth IRA

Roth IRAs are not investments on their own. You earn from investing in CDs, stocks, bonds, mutual funds, and other investment options through the IRA. 

You can open an IRA at a bank, insurance company, online broker, or any financial institution that offers it as an option.

Most IRAs compound annually. If you invest wisely, they should give an average interest rate of at least 6% APY

If you choose to invest through a broker, they’ll invest for you.

Strategy 

You should invest in a Roth IRA if you presume that future tax rates will be higher than current ones. Avoid investing your Roth IRA funds in CDs and other low-yield investments. Just a little money in a Roth IRA if done early enough can mean huge earnings down the line

 3.  High-yield corporate bond funds

Pros

  • Bonds offer above-inflation interest rates on investment compared to investment-grade bonds.
  • Because you are lending to a company you can earn decent interest but still enjoy lower risk since they face legal action over a default.

Cons

  • If you go through a broker then you have to pay management fees.
  • Many corporate bonds are unavailable to the average investor.

A corporate bond is a debt investment from a company to raise capital. Like a government bond, you lend money to a business for a certain amount of time and they pay you the interest.

If you’ve invested in treasury securities such as government bonds, you know that they pay very low yields today. Corporate bonds are a better option for high-yield returns.

The Metropolitan West High Yield Bond Fund, for example, has recorded a dividend yield of over 4% in the past year and is exposed to multiple bonds.

Wholesale corporate bonds can only be accessed by accredited investors in the US and generally have a high minimum buy-in. If you want in, you’ll need to access them through a broker.

Strategy

Go to a major broker like Fidelity or E*TRADE to buy into a wide range of corporate bonds. Make sure you shop around at multiple brokers for the best prices on bonds. You’ll need to make sure the management fees don’t eat away at your interest.

4. REITs (Real Estate Investment Trusts)

 Pros 

  • Decent monthly returns.
  • Property prices tend to rise with inflation, which means you could earn better earnings with price hikes.

Cons 

  • Only a handful of REITs pay monthly dividends. Most pay quarterly dividends.
  • Dividend payments depend on several factors including market changes, tax increases on the property, and quality of management.
  • Your earnings are reduced by income tax paid on dividends especially if you are in a higher tax bracket.
  • Real estate is very tied to major markets.

If you want to invest in real estate but lack the funds, buying REITs are a great way to go.

In REITs, you pool money with other investors to invest in real estate. Professional managers then decide how they will invest the money.

Investing in REITS helps you earn compounded interest at above-average rates
Investing in REITS helps you earn compounded interest at above-average rates
(source: seedly.sg)

There are over 10 major categories of REITs including healthcare, mortgage, office, and residential REITs.

There are two ways to invest in REITs— on trade exchanges such as NYSE or by buying private REITs, however, these are also restricted to accredited investors.

Earnings are quite decent too. In October 2020, STAG industrial REIT paid a dividend yield of 4.8%.

Earning compound interest with REITs

Be sure to choose a provider that pays dividends monthly, which will allow you to maximize your compound interest every month.

5. Peer-to-peer (P2P) investing

Pros

  • Average rates of 5-9%.
  • Low fees.
  • Short investment terms.

Cons

  • Risk is variable depending on which loans you invest in.
  • Secured platforms use crypto that may take some research to understand.
  • Some platforms provide limited deposit methods and also have limits on deposits.
  • It’s a growing industry that still hasn’t been fully regulated.

One of the best new ways to get into compound interest is to invest in P2P lending.

In P2P lending, you invest in loans directly to individual borrowers. Borrowers get loans at better rates than the banks, and you get average rates between 5-9% on short term investments. There are a ton of different platform types in this industry too covering everything from business loans, to college loans.

Strategy 

Go for platforms that provide guarantees or insurance for your investment. And look for platforms that allow you to compound your earnings more frequently. 7% every 6 months is much better than 7% every three years.

There’s one peer to peer lending platform, in particular, you should look into if you are looking for multiple options for compounding interest.

Get compound interest and anytime withdrawals on MyConstant

MyConstant is one of the rare platforms that meet the above two conditions. Not only will you earn above-average rates of interest, but MyConstant compounds these rates in real-time, every second. 

There are three compound interest investment options on MyConstant. You can either:

Earn 4% APY compounded and paid every second by opening up a Flex account. You can start with any amount and withdraw anytime.

Invest for short terms between 1-6 months for up to 7% APR with crypto-back investment. Reinvest after every term to compound your earnings.

Use our crypto-lend option to earn interest at 9% APY compounded and paid every second on your BTC, ETH, AND BNB.

The earlier you start, the more money you can make. Sign up on MyConstant and start doing more with your money.

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