How to Spot High Yield Investments (Easy Guide)

high-yield-investments

Yield, that is, return and risk have a direct relationship. The lower the risk, the lower the return. To get higher returns, you have to invest in market-linked investments, not just fixed-income investments. High yield investments are investments that produce a high return in the form of a dividend to the investor.

Before investing in this, it is important you know that higher yield always comes with higher risks. Understand your risk tolerance to keep from losing your principal.

The post has some high yield investments you can invest in and specific information you need to know before you invest in them.

To this effect, it is going to be classified into two; Low-risk Investments with high yield and high yield investments with high risk.

High Yield Investments with High-Risk

Some of them are listed below. Investopedia agrees with these choices;

High Yield Bonds

They are often called junk bonds. They have the characteristics of taking higher risks for higher returns or yield.

The companies issuing them pay a higher yield in order to attract investors.

You can buy individual high yield bonds, but most investors would find high yield bond mutual funds or exchange-traded funds (ETFs) to be a more attractive and diversified option.

What you should know about High yields Bond investments

The following points should be considered according to USNews.

It requires serious research.

You need to find out all the information there is before investing in them.
Investors who are interested in buying individual corporate bonds need to review the company critically. Check if they have a positive cash flow, then profitability. Compare it with industry performance.

High yield bonds funds require diversification

High yield bond funds have different assets from different issuers. This is especially true as ETFs have different assets in their portfolio, because of that, a decline in the yield of one stock cannot affect the overall yield of all portfolio.

This was explained in detail in our post on Understanding Dividend stocks and how to Invest. You should read it.

Learn about mutual fund and ETF differences

Mutual funds are actively managed. The investor can take advantage of mispricing. For mutual funds, to get your money, the fund manager needs to sell the securities. This can be difficult if market conditions are bad.

ETFs offer a passive income type. Unlike the mutual funds that show investors their worth quarterly, ETFs offer more transparency and are easier to sell in volatile times.

Mortgage Real Estate

Mortgage real estate investment trusts (REITs) make money by lending to property companies, purchasing mortgages, and mortgage-backed securities. Like all REITs, they’re obligated by law just like utility companies to pay out 90 percent of their profits in the form of dividends to investors in return for favorable tax treatment.

Currency Trading

Currency, or forex trading, as it is called, is not for beginners. You need to understand the market perfectly before starting out. Taking a forex training class is very necessary because it is a high yield investment.

Venture Capital

The future of startups seeking investment from venture capitalists is particularly unstable and uncertain. Many startups fail, but a few are able to offer high-demand products and services that the public wants and needs.

Because of the uncertainty of the investment, it is of very high risk. If it succeeds, the yield is also quite high.

Investing in Options

Options offer high rewards for investors trying to time the market.

An investor who purchases options may purchase a stock or commodity equity at a specified price within a future date range. If the price of a security turns out not to be as the investor originally predicted, the investor does not have to purchase or sell the option security.

This form of investment is especially risky because it places time requirements on the purchase or sale of securities. Professional investors often discourage the practice of timing the market and this is why options can be dangerous or rewarding.

Low-Risk High Yield Investments

We are just going to list a few of them:

  • Dividend Stock: We already have a post dedicated to this. Read it here.
  • Corporate Bonds: Corporations can issue bonds to investors to raise money. These short term bonds are less risky and have an average maturity of one to five years, making them less exposed to changes in interest rates. Since some investors want a little more risk for a higher return, they can diversify the bonds. However, you should invest in corporations that are financially solid. If you invest in big public companies like Google, Amazon, or Apple, you’ll minimize the likelihood of losing your money because it’s very unlikely they will go bankrupt in the near future.
  • Preferred Stock: Preferred shares provide shareholders with the ability to receive dividends before shareholders of the company’s common stock. Even if the company declares bankruptcy.
  • Others include; Certificates of deposits, high yield savings account, money market accounts, treasury securities, etc.

To spot a high yield investment,

  • Check the risk involved. High risk equals high return
  • Make your research about company cashflow and profitability
  • Check industry performance
  • Duration of the investment. Short term investments usually have a lower yield.

In conclusion, high yield investments require a high risk by the investor. Every investor should check the level of risk he can bear before wanting to invest in a  high yield product.