11 High Yield Investments Risk Takers Should Know

11 High Yield Investments Risk Takers Should Know

High yield investments offer extra income. But high returns go hand in hand with greater risks. Too many people get caught up in the yield as if it was free money. It’s not.

When you evaluate investments that appear to pay more, you should approach them like Sherlock Holmes. That should come with a healthy degree of skepticism as there are realistic cause and effect relationships. The return is higher because the risk is higher.

Be sure to question everything and pay attention to the details.

Basically, many income investors look for the best yields they can find on their investments. They prefer high levels of current income over growth potential over the long run. Many different high-income investments focus on paying as much money to investors as possible. It can be valuable not only for those who are already in retirement but also for those who like to get regular cash flow to fund further investments in their portfolio.

Thus, doing your detective work means knowing how the high-yield investment generates its returns and what factors would cause those returns to go up or down. You should only consider buying after you understand these factors such as financial operating condition, industry competitors and overall economic conditions.

Guess what the reward for such risk? Yields which are significantly higher than safer alternatives like treasury securities supported by the U.S. government.

You’ll learn more about various opportunities to boost your income through stocks, funds, and other investment vehicles. Start your search for yield with the list below. Remember, although they may generate a significant amount of monthly or quarterly income, expect your principal to fluctuate, sometimes drastically with high yield investments.

11 high yield investments infographic

High Yield Bonds

High yield bonds are issued by companies whose financial strength is not rock solid. Often referred to as “junk bonds,” they must pay a higher yield than other safer alternatives to attract investors.

You can buy individual high yield bonds. However, most investors would find high yield bond mutual funds to be a more attractive and diversified option.

High-yield income investments can put more money in your pocket. But they can also dramatically increase the risk in your portfolio. Only if you’re prudent about which investment vehicles you choose for yourself will you reap the full benefits of high-yield investing.

Real Estate Investment Trusts (REITs)

Think of a REIT like a mutual fund that owns real estate.

The REIT then passes along the rental income from that real estate to you, the investor. REITs can be publicly traded or private, and may own a broad portfolio of real estate or a narrow one.

Through REITS you can invest in apartments, hotels, office space, retail space, healthcare related properties, mortgages, storage and other types of real estate related property.

Preferred Stocks

Technically, a preferred stock is an equity investment. However, they often get compared to bonds as they are highly interest rate sensitive. Preferred stocks pay dividends at a fixed rate and a company has to pay dividends to their preferred stock holders.

Thus, this has to be complete before a single penny gets paid out to common stock holders. This feature can make them an attractive source of high yield investment income.

Dividend Paying Stocks

Dividends from stocks can provide a source of retirement income which may change. If the company gets in financial trouble, it can reduce or remove the dividend all together.

You can look up stocks with a history of steady and rising dividends or buy a dividend income fund.

Closed End Funds

A closed end fund is a form of a mutual fund. It contains a pool of investor money like mutual funds. Once the fund has issued a certain number of shares, it closes to new investors. Thus, to buy shares, you must buy them just like you buy a stock.

Many closed end funds use leverage. They can borrow against the portfolio to buy additional investments which can contribute to their high yields. Not all closed end funds are bound to pay income. Some can also distribute principal as part of their monthly or quarterly distributions, so search carefully.

When using closed end funds, keep in mind it’s best to buy these high yield investments when they’re trading at a discount.

Some closed-end funds use leverage to enhance their returns. Leverage like issuing debt or preferred fund shares at fixed interest rates and aiming to take advantage of cheaper borrowing costs than the returns on their investments are good examples.

Keep in mind with closed-ends that they can trade at extensive premiums or discounts to their net asset value. Also, you should evaluate carefully whether you’re getting your money’s worth with a particular closed-end fund.

Man turning risk selector button to the medium position. Investment and financial concept.

Retirement Income Funds

Retirement income funds are professionally managed with the objective of generating consistent monthly or quarterly income. It is put together by the mutual fund industry.

They provide an attractive alternative to managing your own portfolio. Also, they can also function as an alternative to an immediate annuity which returns your principal plus interest over time.

Peer to Peer Investing

A growing trend for alternative asset investors looking for high yield investments is to invest in loans originated by online lending portals. This is called “peer to peer” lending, or P2P, as it’s more like lending money to a neighbor or peer.

The online portal connects investors and borrowers and provides a platform that sets market rates for the loans. Online lenders can reduce typical loan funding expenses making the interest rate for borrowers lower than traditional hard money loan. These loans can be pooled together or funded by one person. Basically, you can lend small amounts to many people or a larger amount to one person.

Master Limited Partnerships

A master limited partnership (MLP) is a publicly traded partnership which, unlike a corporation, passes its income through to you.. This structure allows the company to avoid paying taxes at the corporate level, which is one of the reasons they make attractive high yield investments.

The amount of income generated by a master limited partnership will be dependent on the price and volume of the product or service they produce. Most often, they are in the oil and gas business. You’ll also find master limited partnerships that produce propane, timber, and manage pipelines.

The downside of MLPs is that taxation can get worse. This happens especially when the states in which MLPs do business assert their rights to state income taxes. Holding MLPs in retirement accounts might seem to avoid that issue.

However, it comes with the danger of unrelated business income tax. Also, for many investors in the energy sector the high income and growth potential of MLPs outweighs these negatives.

Canadian income trusts

The Yield Hunter has been a reliable source of information on high yield investments. They use the following definition for a Canadian Income Trust.

Broadly, we can define income trusts as vehicles that hold direct or indirect holdings in income producing assets strictly for the purpose of paying high, stable and predictable income streams to the unit holders.

Loans Backed by Deeds of Trust

Many commercial real estate projects and even residential home purchases secure their initial funding from private sources. There are small to mid-size private companies which specialize in matching investors with builders or buyers who need funds.

Fortunately, when you lend money on these types of projects you should be listed on the deed of trust as a lien holder. So if the borrower stops making the payments, you can close out. However, closing out can be a lengthy process and you don’t know what shape the property will be in if you end up having to take it back.

This form of investing is sometimes called investing in deeds of trust. Private lending can certainly produce high yields, but proceed with caution. Too many companies market this type of high yield investing as “safe”. Your investment is backed by collateral but no high yield investment is “safe”.

Business development companies

Business development companies are investment companies that offer capital financing to smaller businesses. These businesses are often privately held and don’t always have access to more traditional sources of financing. Also, BDCs help to bridge the gap by exchanging cash for interests in those businesses.

Some BDCs focus on debt financing, making money from relatively high interest rates charged to their borrowers. Others use equity financing, banking on appreciating share-price value in their client companies. You can often find BDC dividend yields of 10% or more.

BDCs pay high yields because they have to distribute at least 90% of their taxable income to their shareholders in order to qualify for status as a regulated investment company, which avoids entity-level taxation. BDCs also typically use leverage to magnify their returns, borrowing at lower rates and lending at higher rates.

Default risk is the primary downside of investing in BDCs, but well-run business development companies can manage that risk and produce solid returns over time.

See Also: Investing 101: Different Types of Investments

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