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Jun

2023

25+ Potential Ways to Invest in a Carbon-free Future

27 Potential Ways to Invest in a Carbon-free Future

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Impact investing and socially responsible investing has been growing in popularity in recent years, and will continue to grow for the foreseeable future.

Investing in a carbon-free future is one of the most powerful ways for individuals to help restore the climate. Studies have shown that investing in climate mitigation and adaptation now will prevent trillions of dollars in future losses from disaster relief, GDP decreases, and property losses, and it will cost far less to act now than to deal with future damages.

Another reason to start investing in a carbon-free future now: Since there will be a worldwide focus on the transition to a carbon-free economy in the coming years and decades, some investors might consider investing in green stocks to be one way to build a strong long-term portfolio. As with all investing, it’s essential to carefully consider the risks involved in your chosen investment strategies. Some, all, or none of the below strategies may be appropriate for you.

How Carbon Impacts Our Planet

Current carbon dioxide (CO2) levels in the atmosphere are higher than they have been in at least 800,000 years, and likely higher than they have been in the past 3 million years.

Human activities ranging from automobile use and building construction to agriculture results in greenhouse gas emissions. Over millions of years prior to the Industrial Revolution, carbon was removed from the atmosphere naturally through plant photosynthesis and other processes—but by fossil fuels like coal and oil, humans have put that carbon back into the atmosphere in just a few hundred years. Once emitted, that CO2 stays in the air for centuries.

Changing the concentration of greenhouse gases in the atmosphere changes the Earth’s carbon cycles and results in global climate change. Some effects of climate change are already visible: rising sea levels, more intense hurricanes and fires, disappearing glaciers, and more. Around half of the CO2 emitted since 1850 is still in the atmosphere, and the rest of it is in the oceans causing ocean acidification, which interferes with the ability of marine life to grow skeletons and shells.

Currently, CO2 emissions continue to increase yearly—so it’s just as important for us to scale up the removal of CO2 from the atmosphere as it is to continue working on reducing emissions.

There are ways companies can do construction, agriculture, and all other industrial activity without emitting greenhouse gases into the atmosphere, but scaling up these solutions will require a massive amount of investment. That’s where individual investors can make a difference—by putting money behind companies that are working to create a carbon-free planet.

Climate-Friendly Industries and Companies to Invest In

Ready to make a difference by supporting climate visionaries? Here are 25+ ways to invest in a carbon-free future.

1. Carbon Offsets

Individuals and companies can purchase carbon offsets to zero out their carbon emissions. How they work: You can calculate your estimated emissions from air or car travel or other activities, and invest in local or international projects that contribute to the reduction of emissions. For instance, an individual could invest in a solar energy project in Africa to offset their annual emissions.

Although carbon offsets are controversial because they don’t directly work to reduce one’s emissions, they do help to build out renewable energy infrastructure, regenerative agriculture, and other important initiatives. They are also helpful for offsetting certain activities that are often unavoidable and have no carbon neutral option, such as flying in a plane.

2. Carbon Credits

Carbon credits give a company the right to emit only a certain amount of carbon dioxide or other greenhouse gases.

They create a cap on the amount of emissions that can occur, and then the right to those emissions can be bought and sold in the market. Caps may be placed on nations, states, companies, or industries.

Carbon credits are controversial because larger companies can afford more credits which they can either use or sell for a profit, and some believe the program may lower the incentive for companies to reduce their emissions.

However, companies may be incentivized to reduce emissions in two different ways:

1. They can sell any extra credits they don’t use, thus making money.
2. Generally, limits are lowered over time, and companies that exceed their limits are fined—therefore, transitioning to lower emissions practices is in their best interest.

Although carbon credits are used by companies, individuals can invest in carbon credits through ETFs, or consider carbon emissions alternative investments.

3. ESG Indices and Impact Investing ETFs

Individuals can invest in ESG (environmental social governance) and impact investing ETFs, which are funds made up of companies focused on socially and environmentally responsible practices. Companies included in these funds may be working on renewable energy, sustainable agriculture, plastics alternatives, or other important areas.

4. Climate and Low-Carbon ETFs

Within the impact investing and ESG investing space, there are ETFs specifically focused on climate change and carbon reduction. These exclude companies that rely on fossil fuels, focusing exclusively on companies deemed as climate-friendly.

5. Carbon Capture, Sequestration, and Storage

There are many ways that carbon can be removed from the atmosphere, including through trees and other plants, or by machinery. CO2 can also be captured at the source of emission before it is released into the atmosphere. Once captured, the carbon needs to be stored in the ground or in long-lasting products, so it doesn’t get leaked into the air. Interested investors might want to consider buying stocks in companies that sequester millions of tons of CO2 each year.

6. Products and Materials Made from Captured Carbon

Once removed from the atmosphere, carbon can be used to make many products and materials, including carbon fiber, graphene, and cement. The construction industry is one of the biggest emitters of carbon dioxide, so replacing standard materials with ones made from sequestered CO2 would have a huge impact. All of these materials industries are poised to see huge growth in the coming years, and investing in them helps promote market growth, which can lower the cost of materials and make them more accessible to customers.

7. Tree-Planting Companies and Sustainable Forestry

The business of planting trees is growing. Newer tree planting companies are currently private, but investors can buy stocks, REITs (Real Estate Investment Trusts) and ETFs in companies that practice sustainable forestry and land management, as well as companies that allow investors to purchase a tree.

8. Regenerative Agriculture

The way the majority of agriculture is currently practiced worldwide depletes the soil and land over time. This not only makes it harder to grow food, it also decreases the amount of CO2 that gets removed from the atmosphere and stored in the soil. But with regenerative agricultural practices, the quality of soil improves over time. Spreading the knowledge and use of regenerative farming is extremely important to both food security and greenhouse gas management. Individuals can invest in regenerative agriculture through REITs, or even by investing in individual farms.

9. Green Bonds and Climate Bonds

Green bonds function the same way as other types of bonds, but they are specifically used to raise money to finance projects that have environmental benefits. Projects could include biodiversity, rewilding, renewable energy, clean transportation, and many other areas in the realm of sustainable development. In addition to buying individual bonds, investors can buy into bond funds.

10. Blue Bonds

Blue bonds focus on protecting the oceans by addressing plastic pollution, marine conservation, and more.

11. Refrigerant Management and Alternatives

Refrigerants used for cooling are among the top five highest emitters in the world, according to nonprofit org Project Drawdown . There are several ways to invest in improvements in the refrigerant industry:

•  Invest in alternative refrigerants such as ammonia and captured carbon dioxide.
•  Invest in companies making new types of cooling devices.
•  Invest in refrigerant management companies that reclaim refrigerants.

Other companies are working to retrofit old buildings and provide new buildings with more efficient HVAC systems.

12. Plant-based Foods

Raising livestock for food has a huge environmental footprint: It leads to huge amounts of deforestation, and cows emit methane when they burp, which is a much stronger greenhouse gas than CO2. Raising cows also uses a lot of water, transportation, chemicals, and energy. Replacing meat and materials with plant-based options can significantly reduce emissions and resource use.

13. Food Waste Solutions

Food waste in landfills does not biodegrade naturally—instead it gets buried under more layers of refuse and biodegrades anaerobically, emitting greenhouse gases into the atmosphere for centuries. Landfills are one of the biggest contributors to global emissions, with food waste contributing 8% of greenhouse gas emissions worldwide.

Some companies are heavily investing in waste-to-energy and landfill gas-to-energy facilities, which turn landfill waste into a useful energy source—essentially making products out of food ingredients and byproducts that would otherwise have gone to waste. One has developed a promising food waste recycling unit that could help reduce the amount of waste that sits in landfills as well.

14. Biodiversity and Conservation

Protecting biodiversity is key to creating a carbon-free future. Biodiversity includes crucial forest and ocean ecosystems that sequester and store carbon while also maintaining a planetary balance of nutrient and food cycles.

Interest in biodiversity investments has been growing, and there is even an ETF focused on habitat preservation.

15. Sustainable Aquaculture

The demand for fish rises every year, in part because eating fish is better for the planet and emissions than eating livestock. But a lot of work goes into making sure fishing is done sustainably to avoid overfishing and species depletion, and prevent widespread disease and wasted seafood. Investors may choose to support sustainable aquaculture by seeking out new and established businesses in the industry, or by investing in ETFs that include companies involved in responsible use and protection of ocean resources.

16. Green Building Materials

Creating construction materials such as steel and concrete results in a significant amount of CO2 emissions. There is currently a race in the materials industry to develop new materials and improve the processes of making existing ones. Both new and established businesses are part of this race. Besides steel and concrete, other key building materials that can contribute to a carbon-free future include bamboo and hemp.

17. Water

Clean water systems are essential to the health of the planet and human life. As the population grows, there will be more demand for water, which requires increased infrastructure and management. Proper water management can have a huge impact on emissions as well.

There are three main ways for individuals to invest in the future of water. One is to invest in public water stocks such as water utilities, equipment, metering, and services companies. Another is to invest in water ETFs or in ESG funds that focus on water.

18. Green Shipping

The transportation of goods around the globe is a huge contributor to greenhouse gas emissions. In order to improve shipping practices, a massive shift is underway. The future of green shipping includes battery-operated vessels, carbon-neutral shipping, and wind-powered ships. Other technologies that play into green shipping including self-driving vehicle technology and AI. Investing in any of these areas can help the shift towards a carbon-free future.

19. Electric cars and bicycles

The use of electric cars and bicycles can significantly reduce the amount of CO2 emissions that go into the atmosphere. Interested investors might want to research stocks in the electric vehicle, charging, and battery space.

20. Telepresence

As has been proven during the COVID-19 pandemic, the reduction of work-related travel can significantly reduce global CO2 emissions. Video conferencing and telepresence tools continue to improve over time, which reduces the need for people to fly and drive to different locations for business meetings. Investing in companies working on these technologies may help solidify and continue the trend of remote work.

21. Bioplastics

Bioplastics include plastics that are completely biodegradable as well as plastics that are made partially or entirely out of biological matter. Currently bioplastics make up a very small portion of global plastic use, but increasing their use can greatly help to reduce waste and emissions.

22. Energy Storage

One of the biggest hurdles to scaling up renewable energy is creating the technology and infrastructure to store the energy, as well as reducing the costs of energy storage to make it more accessible. Investing in energy storage can help develop and improve the industry to help hasten the transition away from fossil fuels.

23. Green Building

Making the construction industry carbon-free goes beyond the creation and use of green building materials to include LED lighting, smart thermostats, smart glass, and more. These technologies can drastically reduce the energy used in buildings. There are many companies to invest in in the green building industry, as well as ETFs that include green building stocks.

24. Recycling and Waste Management

As the world’s population grows and becomes more urbanized, waste management and recycling will become even more important. Preventing waste from going to landfills is key to reducing emissions, as is the reuse of materials. For interested investors, there are many companies to invest in within waste management.

25. Sustainable Food

Food production is heavily resource-intensive, with many moving parts. In addition to companies working to improve soil health, refrigeration, plant-based foods, and food waste, there are also companies working on sustainable fertilizers, pesticides, irrigation, seeds, and other areas. One way to invest in sustainable food is through an ETF.

26. Sustainable Fashion

The fashion industry is one of the world’s worst polluters. In fact, the fashion industry produces about 10% of global carbon emissions, in addition to its huge water use and polluting the ocean with plastics. Several of the world’s most well-known sustainable fashion brands are privately held, but increasingly, public companies are also making big strides in sustainability. Individuals can also support sustainable fashion by investing in material companies and agricultural producers that make bioplastics, bamboo, hemp, and sustainable leather alternatives.

27. Renewable and Alternative Energy

Energy is another important area to invest in for a carbon-free future. Within the renewable and alternative energy space, individuals can invest in companies working on wind, solar, biomass, hydrogen, geothermal, nuclear, or hydropower. There are countless companies and ETFs to invest in within renewable energy.

The Takeaway

Every industry around the world needs to make big shifts in the coming years to reduce emissions and build a carbon-free future. As an individual, investors can make their voices and their choices heard with their dollars, by investing in companies leading the way in sustainability.

Looking to start building your investment portfolio? SoFi Invest® is a great place to start. Using the investing platform, you can research and track stocks and ETFs, view your financial information in one simple dashboard, and buy and sell stocks right from your phone.

Find out how to get started with SoFi Invest.

Jun

2023

What Are Dividend ETFs?

By Austin Kilham | Growing Wealth, Investing | No Comments

Low yields from bond investments across the globe have left investors seeking other sources of income, and dividend stocks have often been where such investors have turned.

The need for income-paying dividend stocks, as well as the expansion of the market for exchange-traded funds (ETFs), have made dividend ETFs increasingly popular.

With dividend ETFs, not only do shareholders have exposure to potential gains in share price, they may be able to line their pockets with additional income in the form of quarterly payouts. Plus, even if share prices aren’t roaring along, these dividends can still provide a little income boost.

Let’s dig deeper into dividend ETFs.

ETFs Basics

An ETF is a fund that allows individuals to invest in a diversified basket of investments, such as stocks, bonds, and other assets.

Most ETFs track some sort of index, such as the S&P 500, which itself tracks the performance of the 500 largest U.S. stocks. Their holdings primarily mirror the assets included in the index. That said, there may be a small percentage of the portfolio that may lie outside the fund and vary a little bit depending on fund manager choices.

As the name suggests, “exchange-traded funds” are traded in real time on exchanges, such as the New York Stock Exchange or Nasdaq. The price of the ETF fluctuates throughout the day, and these funds can be bought and sold all day.

This is an important distinction from how mutual funds work, which also allow individuals to invest in a basket of investments. Mutual fund trading is done once per day at the end of the trading day.

Another important difference is that ETFs typically have lower fees than mutual funds. Because ETFs that track an index are usually passively managed, they don’t require a lot of intervention and work from fund managers. Less time and energy from fund managers translates into lower fees that end up being passed on to investors.

How Dividend ETFs Work

A dividend ETF works much the same as a regular ETF, though they usually track part or all of a dividend stock index. For example, a dividend ETF might track the Dow Jones U.S. Select Dividend Index , which consists of 100 dividend-paying stocks.

Dividend stocks are securities that pay a portion of company profits out to shareholders. Those dividends are usually paid on a fixed schedule. The process involves three important dates: the declaration date, the date of record, and the payment date.

The declaration date is the day the board of directors announces that it will pay a dividend. The date of record, also known as the ex-dividend date, is the day shareholders “of record” are entitled to the dividend. And finally, the payment date is the actual day that the dividend is paid out. Dividends are usually distributed to shareholders in the form of cash.

Do ETFs Pay Dividends?

Dividend ETFs collect the dividend payments from their underlying stocks and make distributions to the ETF shareholders. The process of payment from a dividend ETFs mirrors that of single dividend stocks. There is a record date, ex-dividend date, and a payment date.

That said, the ETF’s schedule may be different from the schedules followed by its underlying stocks. Dividend ETFs usually make payments according to a regular schedule, which is described in the fund’s prospectus and is publicly available.

Recommended: What are Dividends and How Do They Work?

Types of Dividends

Qualified dividends are those that can be taxed at the capital gains rate. The capital gains rate then depends on the investor’s modified adjusted gross income (MAGI). This is also known as the preferential rate.

In contrast, unqualified dividends are taxed at income tax rates, which are generally higher than capital gains tax rates.

The Internal Revenue Service (IRS) requires that investors hold shares for more than 60 days during a 121-day period. The period starts 60 days before the ex-dividend date.

How Dividend ETFs Are Taxed

ETFs may also be more tax efficient than other similar investments. That’s because they’re passive investments with little turnover in the holdings. The process of creating and redeeming ETF shares are also not subject to capital gains taxes on any individual security within the fund.

Dividend ETFs are a little bit more complicated when it comes to taxes due to the way dividends are taxed by the IRS. There’s no escaping tax on dividends. Shareholder dividends are taxable in the year that they are received whether they are paid in cash or whether they are reinvested. The first thing to pay attention to is whether you are receiving qualified dividends.

The bottom line: Rules for dividend taxation may be complicated, but there are no special rules you have to remember that differentiate how dividends from ETFs are taxed versus those from regular dividend stocks. What matters most is whether those dividends are qualified or unqualified in the eyes of the IRS.

Types of Dividend ETFs

There are hundreds of dividend ETFs that can track all sorts of indexes. We’ve already mentioned one that tracks the Dow Jones U.S. Select Dividend Index of U.S. stocks. Others may track global indexes, while some may target specific indexes by country.

Still others will target equities of specific sizes, or styles, or sector. Some track bond indexes of varying risk. And others target real estate or currency or alternatives. The variety can be dizzying, but investors can take a look at what’s available by looking at the ETF Database directory.

The dividend options on offer leave investors with plenty to choose from. Here’s a closer look at just a few categories of dividend ETFs that investors may encounter:

Dividend Growth ETFs

A company that’s steadily growing its profits should theoretically be able to offer higher dividends in the future. That’s the reasoning behind dividend growth ETFs, which target companies that show increasing profits and sales.

Dividend Value ETFs

Value stocks, like those targeted by dividend value ETFs, are those that operate in relatively stable industries but are priced cheaply compared to the potential value of the company.

They typically have a low price-to-earnings ratio. The idea is that the company may experience a future jump in share price as investors catch on to the company’s true value. Shares inside the ETFs could provide a nice boost in price in addition to the dividends they provide.

Recommended: Value vs. Growth Stocks: What to Know

High Dividend Yield ETFs

This category of ETFs goes after stocks that produce high dividend yields. But here’s the rub: While the payout for these stocks may be big, it doesn’t necessarily mean that the stock will grow particularly fast. In other words, you may be trading swift share price growth for high dividend yields.

Also, as stock price goes down, yield goes up. It’s counterintuitive, but the way this math works out may actually be masking the fact that you’re losing money on the price of the stock. Investors could potentially combat this by looking for ETFs that invest in stocks that at least keep pace with the market long-term.

Some dividend ETFs target the so-called “Dogs of the Dow”. The Dow is an index that comprises the 30 largest U.S. industrial stocks. The “dogs” are the 10 highest-paying dividend stocks within this index, yet they also tend to be the lowest performers when it comes to price gain—hence their slightly unflattering moniker.

One example of a high dividend yield ETF is the Vanguard high Dividend Yield ETF (VYM), which has about $36 billion in assets.

Reinvesting Dividends

Reinvesting dividends is the process of using the income collected from a holding and immediately buying more shares of the stock or ETF that pays out the dividend. The practice is commonly known as dividend-reinvestment plans (DRIP).

The Takeaway

ETFs provide a built-in way to add diversification through the basket of stocks they invest in. Even so, you may still want to consider how the ETF will fit into your overall plan.

When choosing a dividend ETF, you might consider your overall portfolio allocation and diversification. Your portfolio may be built based on three factors: your goals, your time horizon, and your risk tolerance. Adding an investment without considering these factors could throw off your careful plans.

You can also find out quite a bit of information about a fund from its prospectus, which is filed with the Securities and Exchange Commission (SEC) and is available to every member of the public. The prospectus can give you information such as past returns, as well as what kinds of fees you can expect to pay when you invest in the fund. You should also be able to learn more about the fund’s investment strategy.

Once you’ve decided on a fund and you want to purchase shares, you could do so inside an Active Investing account with SoFi. You can buy and sell your own stocks, all with no commission and no account minimums. You’ll also have access to financial advisors who can help you figure out the options to suit your needs. To learn more about how to build your investment portfolio, visit SoFi Invest®.

Download the SoFi Invest mobile app today.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Jun

2023

Pros & Cons of Quarterly vs Monthly Dividends

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Investing in stocks can help an investor build a portfolio over time while diversifying to manage risk. Adding dividend-paying stocks to the mix can also help to create a steady stream of income.

Not all stocks pay dividends. But those that do may pay out dividends on a monthly or quarterly basis. When investing in dividend stocks, it’s important to consider whether it’s better to receive monthly dividends or quarterly dividend payments.

For those investors interested in generating passive income inside their portfolio, it helps to know how stocks that pay dividends monthly versus quarterly compare.

Quick Dividend Overview

A dividend is a percentage of a company’s profits that are paid out to shareholders, typically on a fixed schedule, i.e. monthly, quarterly, annually, etc. If a company issues a dividend outside of its regular payment schedule, this is referred to as a special or extra dividend.

If you’re not familiar with dividends or dividend-paying stocks, here’s a quick primer on how dividends work.

Do All Stocks Pay Dividends?

No, not all stocks pay dividends. When looking at value vs growth stocks, an investor should bear in mind that growth stocks typically don’t offer a dividend payout to investors because the company reinvests all profits back into growth projects.

A value stock, on the other hand, may be in a better position to pay out dividends. Value stocks are companies that are undervalued by the market. These companies can pay out reliable dividends to investors and also offer capital appreciation if their stock price increases over time.

Companies that have an extended track record of paying dividends may be referred to as Dividend Aristocrats. These are S&P 500 companies that have consistently increased their dividend payout to investors over the previous 25 years or longer.

Why Do Companies Pay Dividends?

Public companies aren’t required to pay out dividends to their shareholders. But a company may choose to do so for any of the following reasons:

•  As a reward to shareholders
•  To attract new investors
•  Because there’s no need to reinvest dividends in the company’s growth

Dividend payments are a way to measure a company’s financial well-being. If a company consistently pays out dividends to shareholders, that can signal financial strength, which may be a draw to new investors.

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Monthly Dividends vs Quarterly Dividends: How They Work

If a company chooses to issue dividend payouts to its shareholders, it can determine the schedule for doing so. That can involve paying monthly dividends or paying them quarterly instead.

Whether an investor has monthly paying dividend stocks or quarterly paying dividend stocks, there are different ways they can receive those payments. For example, the company might issue a check for the dividend amount at the appointed time.

Some companies may allow investors to use their dividends to purchase additional shares through a Dividend Reinvestment Plan (DRIP). With a DRIP, investors can use their dividend payouts to purchase full or fractional shares of the same company.

This might be preferable to receiving a check quarterly or monthly if an investor is looking to grow their portfolio, versus creating an income stream. Another advantage of using a DRIP with stocks that pay dividends monthly or quarterly is that an investor may be able to avoid commission fees by reinvesting.

Are Monthly Dividends Better Than Quarterly Dividends?

If you’re receiving dividend payouts from one or more stocks in your portfolio, you may not think there’s much difference in when you receive those payments. But investing in stocks that pay dividends monthly versus quarterly could yield some important benefits.

Monthly Dividend Payouts as Regular Income

First, consider the advantage of receiving regular income (assuming the dividends are not being reinvested through a DRIP). If a portfolio includes a number of monthly paying dividend stocks that have higher dividend yields, an investor could have a nice chunk of income coming their way each month, and possibly even live off that dividend income.

An investor could use that money to cover regular bills, grow their savings, pay down debt, or invest it for the future through an IRA or college savings account. Having that added income stream can make budgeting and planning for short- or long-term financial goals easier. Those things could be more difficult to achieve with dividends that only arrive on a quarterly basis.

Reinvesting Monthly Dividend Payouts

Next, and perhaps more importantly, it may be possible to generate more income from monthly dividends by reinvesting them consistently into additional shares of stock. This ties in to the concept of compounding interest and how it works.

Compounding interest is essentially interest an investor earns on their interest, and it can be a powerful tool for growing wealth over the long term. The more time one has to invest and reinvest dividends, the more time one has to benefit from compounding’s effects.

In theory, investing in stocks that pay dividends monthly versus quarterly could work in an investor’s favor if they’re able to compound their money faster. So not only could they benefit from more regular dividend income payments, they could also potentially see more income from those stocks over time.

Whether this bears out in an investor’s portfolio depends largely on the dividend-paying stocks they own, of course. That’s why it’s important to understand how different stocks compare when investing for dividends to make sure you’re choosing ones that fit your personal investment goals.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

How to Create Monthly Income With Quarterly Dividends

It’s possible to reap the benefits of stocks that pay dividends monthly even if your portfolio only includes stocks that pay dividends quarterly. But this requires a little more work compared to choosing stocks that pay monthly dividends already.

The process involves choosing quarterly dividend stocks that can be staggered over 12 months. For example, an investor might choose three stocks that pay quarterly dividends:

•  Stock A pays dividends in January, April, July and October
•  Stock B pays dividends in February, May, August and November
•  Stock C pays dividends in March, June, September and December

By shaping a portfolio this way, an investor could get the benefit of monthly dividends without having to own stocks that pay dividends each month. But it’s important to consider what kind overall income one could generate when compounding interest is taken into account, versus choosing stocks that already pay monthly dividends.

The Takeaway

Investing in a mix of growth stocks and income stocks that generate dividends can help an investor build a well-rounded portfolio. For individuals who aren’t investing yet, getting started can make it easier to leverage the benefits of compounding interest over time.

When comparing dividend stocks, it helps to consider how frequently you’ll be able to receive those payments, as well as the amount of the dividend itself.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA(www.finra.org)/SIPC(www.sipc.org).

Jun

2023

Investing in Chinese Stocks

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

China represents a part of the global investor marketplace known as the “emerging markets,” or countries that are headed toward first-world status and undergoing a period of rapid growth. China has the second largest economy in the world and is rapidly growing. Economists estimate that the country will overtake the USA to become the largest economy in the years to come.

Some prominent macro investors have expressed positive sentiments about emerging market opportunities. In spite of the potential opportunities, investing in foreign stocks can be confusing, scary, and in some cases impossible. Here are some facts about investing in Chinese stocks.

Can You Invest in Chinese Stocks?

The short answer is yes, investors located in the US and elsewhere do generally have the capability of trading international stocks, including investing in Chinese stocks. The details aren’t always so simple, though.

The majority of Chinese stocks can only be traded on Chinese exchanges, including the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange.

There are ways for foreigners to participate in these markets, either directly or through various types of investment vehicles or intermediaries. For the most part, buying Chinese stocks is not unlike buying US stocks. Investors may only need to search for specific securities or utilize a special intermediary firm in addition to their standard brokerage.

What are the Best Chinese Stocks to Buy?

For US investors, choices may be limited. If there are a limited number of Chinese stocks that can be purchased directly on a stock exchange, then it’s just a matter of evaluating stocks on the list choosing whichever ones seem most attractive.

How Can Foreigners Invest in the Chinese Stock Market?

To buy and sell stocks on foreign exchanges, investors often have to contact their brokerage firms and ask if they allow participation in foreign markets. If the answer is yes, the firm could then consult with a market maker, known as an affiliate firm. Affiliate firms, which are located in the country where foreign investors want to buy stocks, help facilitate these types of transactions.

The easiest way for many investors to gain exposure to the Chinese stock market might be to purchase shares in an emerging markets mutual fund or exchange-traded funds (ETFs) that includes some stocks from publicly-traded companies based in China.

To do this, investors can look for funds that track a Chinese index. Some examples include:

•   Shenzhen Composite Index, which tracks the Shenzhen Stock Exchange
•   Shanghai Shenzen CSI 300 Index, which tracks parts of the Shanghai and Shenzhen exchanges
•   Shanghai Stock Exchange Composite Index, which tracks the Shanghai Stock Exchange

As far as the actual process of buying Chinese stocks is concerned, doing so will look like buying any other stock. This holds especially true for those buying an ETF or mutual fund. Buying individual Chinese securities may involve an extra step with an affiliate firm, as mentioned earlier.

In either case, investors have to first open a brokerage account, decide which securities they would like to own, then create appropriate buy orders.

Pros & Cons of Buying Chinese Stocks

While the decision ultimately lies with an individual investor, there are both pros and cons of global investments, including Chinese stocks. Here, we will explore both perspectives.

Pros of Buying Chinese Stocks

Factors like a long-term outlook, China’s response to the recent health crisis, and international diversification can make Chinese stocks appealing to some investors.

Long-term Time Horizon

Some investors believe that Chinese investments have a positive long-term outlook— regardless of any short-term political concerns (more on that in Cons of Buying Chinese Stocks, below). China has been growing fast and could continue to do so, making the country an ideal place to invest for the long haul.

China’s Response to the COVID-19 Pandemic

After the COVID-19 pandemic shut down most major economies in the world for an extended period of time, many areas saw contracting economic growth and continued to struggle. China, on the other hand, responded quickly and was able to reopen its economy sooner than many others, marking the country as a champion of growth throughout the pandemic and beyond.

International Diversification

Some investors choose to invest in the stocks of different countries as a way to further diversify their portfolios. The rationale: An investor could be diversified within and across different industries, but if something were to negatively affect the economy of the country those industries are in, it might not matter.

Cons of Buying Chinese Stocks

There are a few reasons why some investors might choose to avoid Chinese stocks.

Delisting of Some Chinese Companies

In recent times, executive orders have removed some Chinese stocks from American stock exchanges, including a Chinese oil firm named Cnooc (CEO) and China Mobile (CHL).

Growth Limits

Even though China has been growing rapidly, some believe the nature of the Chinese government could stifle innovation going forward. Which industries survive and which ones don’t can sometimes be determined by a simple forced government decision. One perspective is that China’s best growth days are behind it.

Are Chinese Stocks Undervalued?

It is impossible to say for certain. From a long-term perspective, if someone assumes that China will keep growing at a similar pace as it has in the past, then Chinese stocks in general could be undervalued. But there could also be some sectors that are currently overvalued, some stocks more undervalued than others, and so on.

The Takeaway

China is considered to be one of the strongest emerging market economies, leading some investors to see potential for great returns there. Foreign investors have several options if they want to invest in Chinese stocks. Doing so may not be any different than buying stocks in one’s home country. And because of its large economy, there may be other stocks affected by China as well, even if they aren’t Chinese stocks.

For investors looking to open or add to their portfolio, SoFi Invest® offers both active and automated investing, with the potential to buy IPOs at IPO prices, trade stocks and ETFs, and manage their accounts from a convenient mobile app.

Find out how to get started with SoFi Invest.

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SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Jun

2023

How Does the Bond Market Work?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

One of the key tenets of building a strong portfolio is diversification—investing in different types of assets in order to mitigate risk and see steady long-term growth.

Besides stocks, bonds are a popular asset class which is considered one of the most secure investments one can make. When the stock market is headed for a storm, the bond market can act as a safe haven. Although people talk about stocks a lot more, the bond market is actually quite a bit larger. In 2020 the market cap of the global bond market was about $160 trillion, while the market cap of the stock market was $95 trillion.

The bond market has a long history. The first bonds were issued in the late 1600s by the Bank of England to help raise funds to fight a war against France. Since then, the global bond market has continued to grow and flourish.

So, what exactly is a bond and how does the bond market work?

Why the Bond Market Exists

Just as individuals need to take out loans in order to buy a home or pay for other expenses, governments, cities, and companies also need to borrow money. They can do this by selling bonds, a form of structured debt, and paying a specified amount of interest on them over time.

Essentially a bond is an interest-bearing IOU. An institution might need to borrow millions of dollars, but individuals are able to lend them a small amount of that total loan by purchasing bonds. The reason an institution would choose to issue bonds instead of borrowing money from a bank is that they can get better interest rates with bonds.

Bonds are issued for a specific length of time, called the “term to maturity.” A fixed amount of interest gets paid to the investor every six months or year, and the principal investment gets paid back at the end of the loan period, on what is called the maturity date. In some cases, the interest is paid in a lump sum on the maturity date along with the principal investment funds.

Recommended: How Do Bonds Work?

For example, an investor could buy a $10,000 bond from a city, with a 10-year term that pays 2% interest. The city agrees to pay the investor $200 in interest every six months for the 10 year period, and will pay back the $10,000 at the end of the 10 years.

Bonds are generally issued when a government or corporation needs money for a specific purpose, such as making capital improvements or acquiring another business.

Primary vs Secondary Bond Markets

Bonds are sold in two different markets: the primary market and the secondary market. Newly issued bonds are sold on the primary market, where sales happen directly between issuers and investors. Investors who purchase bonds may then choose to sell them before they reach maturity, using the secondary market. One may also choose to purchase bonds in the secondary market rather than only buying new issue bonds.

Bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating, (more on that below). Notes with higher interest rates and more years left until maturity are worth more than those with low rates and those that are nearing maturity.

Differences in Bonds

Bond terms and features vary depending on the type and who issues them. The main types of bonds are:

US Treasury Bills

These government-issued short-term bonds are the safest, but pay the least interest. The sale of treasuries funds all government functions. These bonds are subject to federal income taxes, but are exempt from local and state income taxes.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

Longer-Term Treasury Bills

Bonds such as the 10-year note are the next safest option and pay a slightly higher interest rate.

Treasury Inflation Protected Securities (TIPS)

These bonds specifically protect against inflation, so they pay out a higher interest rate than the rate of inflation.

Municipal Bonds

Also known as muni bonds, these bonds are issued by cities and towns. They are somewhat riskier than treasury bills but offer higher returns. Muni bonds are exempt from federal taxes, and often state taxes as well.

Agency Bonds

Agency bonds are sold to fund federal agriculture, education, and mortgage lending programs. They are sold by Government Sponsored Enterprise (GSE) including Freddie Mac and Fannie Mae.

Corporate Bonds

The riskiest bond types are those issued by companies. The reason they have more risk is that companies can’t raise taxes to pay back their debts, and companies always have some risk of failure. The interest rate on corporate bonds depends on the company. These bonds typically have a maturity of at least one year, and they are subject to federal and state income taxes.

Junk Bonds

Corporate bonds with the highest risk and highest potential return are called junk bonds or high yield bonds. All bonds get rated from a high of AAA down to junk bonds—more on bond ratings below.

Convertible Bonds

Corporate bonds that can be converted into stock at certain times throughout the term of the bond.

Mortgage-Backed Bonds

These bonds consist of pooled mortgages on real estate.

Foreign Bonds

Similar to US bonds, investors can also purchase bonds issued in other countries. These carry the additional risk of currency fluctuations.

Emerging Market Bonds

Companies and governments in emerging markets issue bonds to help with continued economic growth. These bonds have potential for growth but can also be riskier than investing in developed market economies.

Zero Coupon Bonds

Zero coupon bonds don’t pay interest, but are sold at a great discount. Some bonds get transformed into zero coupon bonds, while others start out as zero coupon bonds. Investors earn a profit when the bond reaches maturity because it will have increased in value, and they receive the face value of the bond at the maturity date.

Bond Funds

Investors can also buy into bond funds or bond ETFs, which are groups of different types of bonds collected into a single fund. There are bond funds that group together corporate bonds, junk bonds, and other types of bonds. These funds are managed by a fund manager. Bond funds are safer than individual bonds, since they diversify money into many different bonds.

Bond Indices

Similar to a stock index, there are bond indices that track the performance of groups of bonds. Examples of bond indices include the Merrill Lynch Domestic Master, the Citigroup US Broad Investment-Grade Bond Index, and the Barclays Capital Aggregate Bond Index.

What to Look at When Choosing Bonds

When investors are looking into stocks to invest in, the differences are mainly in the prospects of the company, the team, and the company’s products and services. Stock shares themselves tend to be pretty similar. Bonds, on the other hand, can have significantly different terms and features. For this reason, it’s important for investors to have some understanding of how bonds work before they begin to invest in them.

The main features to look at when selecting bonds are:

Maturity

The maturity date tells an investor the length of the bond term. This helps the buyer know how long their money will be tied up in the bond investment. Also, bonds tend to decrease in value as they near their maturity date, so if a buyer is looking at the secondary market it’s important to pay attention to the maturity date. Bond maturity dates fall into three categories:

•   Short term: Bonds that mature within 1-3 years.
•   Medium-term: Bonds that mature around ten years.
•   Long-term: These bonds could take up to 30 years to mature.

Secured vs. Unsecured

Secured bonds promise that specific assets will be transferred to bondholders if the corporation is unable to repay the bond loan. One type of secured bond is a mortgage-backed security, which is secured with real estate collateral.

Unsecured bonds, also known as debentures, are not backed by any assets, so if the company defaults on the loan the investor loses their money. Both have their benefits and disadvantages, so it is a good idea to understand the difference between secured and unsecured bonds.

Yield

This is the total return rate of the bond. Although a bond’s interest rate is fixed, its yield fluctuates since the price of the bond changes based on market fluctuations. There are a few different ways yield can be measured:

•   Yield to Maturity (YTM): YTM is the most commonly used yield measurement. It refers to the total return of a bond if all interest gets paid and it is held until its maturity date. YTM assumes that interest earned on the bond gets reinvested at the same rate of the bond, which is unlikely to actually happen, so the actual return will differ somewhat from the YTM.
•   Current Yield: This calculation can help bondholders compare the return they are getting on a bond to the dividend return they receive from a stock. It looks at the bond’s current market price and the amount of interest earned on that bond.
•   Nominal Yield: This is the percentage of interest that gets paid out on the bond within a certain period of time. Since the current value of a bond changes over time, but the nominal yield calculation is based on the bond’s face value, the nominal yield isn’t entirely accurate.
•   Yield to Call (YTC): Some bonds may be called before they reach maturity. Bondholders can use the YTC calculation to estimate what their earnings will be if the bond gets called.
•   Realized Yield: This is a calculation used if a bondholder plans to sell a bond in the secondary market at a particular time. It tells them how much they will earn on the bond between the time of the purchase and the time of sale.

Price

This is the value of a bond in the secondary market. There are two bond prices in the secondary market: bidding price and asking price. The bidding price is the highest amount a buyer is willing to pay for a specific bond, and the asking price is the lowest price a bondholder would be willing to sell the bond for. Bond prices change as market interest rates change, along with other factors.

Rating

As mentioned above, all bonds and bond issuers are rated by bond rating agencies. The rating of a bond helps investors understand the risk and potential earnings associated with a bond. Bonds and bond issuers with lower ratings have a higher risk of default.

Ratings are done by three bond rating agencies: Standard & Poor’s, Moody’s, and Fitch. Fitch and Standard & Poor’s rate bonds from AAA down to D, while Moody’s rates from Aaa to C.

Bond Market Terminology

When buying bonds, there are several terms which investors may not be familiar with. Some of the key terms to know include:

•   Liquidation Preference: If a company goes bankrupt, investors get paid back in a specific order as the company sells off assets. Depending on the type of investment, an investor may or may not get their money back. Companies pay back “Senior Debt” first, followed by “Junior Debt.”
•   Coupon: This is the fixed dollar amount paid to investors. For example, if an investor buys a $1000 bond with a 3% interest rate, and interest gets paid out annually, the coupon rate is $30/year.
•   Face Value: Also referred to as “par,” this is the price of the bond when it reaches maturity. Usually bonds have a starting face value of $1,000. If a bond sells in the secondary market for higher than its face value, this is known as “trading at a premium,” while bonds that sell below face value are “trading at a discount.”
•   Duration Risk: This is a calculation of how much a bond’s value may fluctuate when interest rates change. Longer term bonds are at more risk of value fluctuations.
•   Puttable Bonds: Some bonds allow the bondholder to redeem their principal investment before the maturity date, at specific times during the bond term.

The Bond Market and Stocks

Although there is no direct correlation between the bond market and the stock market, the performance of the secondary bond market often reflects people’s perceptions of the stock market and the overall economy.

When investors feel good about the stock market, they are less likely to buy bonds, since bonds provide lower returns and require long-term investment. But when there’s a negative outlook for the stock market, investors want to put their money into safer assets, such as bonds.

How to Make Money on Bonds

While the most obvious way to make money on bonds is to hold them until their maturity to receive the principal investment plus interest, there is also another way investors can make money on bonds.

As mentioned above, bonds can be sold on the secondary market any time before their maturity date. If an investor sells a bond for more than they paid for it, they make a profit.

There are two reasons the price of a bond might increase. If newly issued bonds come out with lower interest rates, then bonds that had been previously issued with higher interest rates go up in value. Or, if the credit risk profile of the government or corporation that issued the bonds improves, that means the institution will be more likely to be able to repay the bond, so its value increases.

Advantages of Bonds

There are several reasons that bonds are a good investment, and they have some advantages over stocks and other assets.

•   Predictable Income: Since bonds are sold with a fixed interest rate, investors know exactly how much they will earn from the investment.
•   Security: Bonds are considered to be a much safer investment than stocks. Although they offer lower interest rates than most stocks, they don’t have the volatility and risk.
•   Contribution: The funds raised from the sale of bonds may go towards improving cities, towns, and other community features. By investing in bonds, one is supporting community improvements.
•   Diversification: Bonds can be a great addition to an investment portfolio because they provide diversification away from stocks. Building a diversified portfolio is key to long-term growth.
•   Obligation: There is no guarantee of payment when investing in stocks. Bonds are a debt obligation that the issuer has agreed to pay.
Profit on Resale: Investors have the opportunity to resell their bonds in the secondary market and make a profit.

Disadvantages of Bonds

Although there are many upsides to investing in bonds, they also have some risks and downsides. Like any investment, it’s important to do research before buying.

•   Lack of Liquidity: Investors can sell bonds before their maturity date, but they may not be able to sell them at the same or higher price than they bought them for. If they hold on to the bond until its maturity, that cash isn’t available for use for a long period of time.
Bond Issuer Default and Credit Risk: Bonds are fairly secure, but there is a possibility that the issuer won’t be able to pay back the loan. If this happens, the investor may not receive their principal or interest.
•   Low Returns: Bonds offer fairly low interest rates, so in the long run investors are likely to see greater returns in the stock market. In some cases, the bond rate may even be lower than the rate of inflation.
•   Market Changes: Bonds can decrease in value if the issuing corporation’s bond rating changes, if the company’s prospects don’t look good, or it looks like they may ultimately default on the loan.
•   Interest Rate Changes: One of the most important things to understand about bonds is that their value has an inverse relationship with interest rates. If interest rates increase, the value of bonds decreases, and vice versa. The reason for this is that if interest rates rise on new bond issues, investors would prefer to own those bonds than older bonds with lower rates. If a bond is close to reaching maturity it will be less affected by changing interest rates than a bond that still has many years left to mature.
•   Not FDIC Insured: There is no FDIC insurance for bondholders. If the issuer defaults, the investor loses the money they invested.
•   Call Provision: Sometimes corporations have the option to redeem bonds. This isn’t a major downside, but does mean investors receive their money back and will be able to reinvest it.

How to Buy Bonds

Bonds differ from stocks in that they aren’t traded publicly. Investors must go through a broker to purchase most bonds, or they can buy US Treasury bonds directly from the government.

Brokers can sell bonds at any price, so it’s important for investors to research to make sure they are getting a good price. They can also check the Financial Industry Regulatory Authority (FINRA) to see benchmark data and get an idea about how much they should be paying for a particular bond. FINRA also has a search tool for investors to find credible bond brokers.

As mentioned above, traders can either buy bonds in the primary or secondary market, or they can buy into bond mutual funds and bond ETFs.

Get Started Buying Bonds

For those looking to start investing in bonds, stocks, and other assets, there are many great tools available to help. One easy way to start buying into the bond market is using SoFi Invest’s® online investment tools. SoFi has an easy-to-use app investors can use to buy and sell bond funds with a few clicks of a button and keep track of their favorite bond funds and stocks, research specific assets, and set personalized financial goals.

Buying into bond funds is a good way for investors to gain exposure to a diversified portfolio of bonds, rather than going through the complex process of choosing individual bonds.

Learn how to use SoFi active investing to buy and sell bond ETFs with zero commission fees.

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