High Yield Investment Options for Risk Takers

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High yield investments offer additional 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, 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.

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

The reward for such risk? Yields that are significantly higher than safer alternatives like treasury securities (which are backed by the U.S. government). Start your search for yield with the list below, but remember, although high yield investments may generate a significant amount of monthly (or quarterly) income, expect your principal to fluctuate, sometimes drastically.

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

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 property.

Preferred Stocks

Technically a preferred stock is an equity investment, but they often get compared to bonds, as they are highly interest rate sensitive. Preferred stocks pay dividends at a fixed rate, and a company is required to pay dividends to their preferred stockholders before a single penny gets paid out to common stockholders. 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 eliminate the dividend altogether. You can do your own search for stocks with a history of steady and rising dividends or you can buy a dividend income fund.

  • Closed-End Funds
    A closed-end fund is a form of mutual fund. Like a mutual fund, it contains a pool of investor money. Unlike a mutual fund, once the fund has issued a certain number of shares, it closes to new investors, so to buy shares you must buy them just like you buy a stock—on an exchange from someone else who is selling their shares. 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 structured to pay income, and some can distribute principal as part of their monthly or quarterly distributions, so search carefully. When using closed-end funds keep in mind it is best to buy these high yield investments when they are trading at a discount.
  • Retirement Income Funds
    Put together by the mutual fund industry, retirement income funds are professionally managed with the objective of generating consistent monthly or quarterly income. They provide an attractive alternative to managing your own portfolio and 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 is 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 are able to reduce typical loan funding expenses making the interest rate for borrowers lower than traditional hard money loan sources. These loans can be pooled together or funded by one person, meaning you can lend small amounts to many people, or a larger amount to one person. In theory, the borrower pays back the loan from their bank account directly to your self-directed IRA account. Just as with any loan, you take on the risk that the borrower may not repay the loan.

    Master Limited Partnerships

    A master limited partnership (MLP) is a publicly traded partnership which, unlike a corporation, passes its income through to you, the investor. 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 or timber, or manage pipelines.

    Canadian Income Trusts

    The Yield Hunter is 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 unitholders.” In the following article you’ll learn more about how to factor in exchange rates and foreign taxes when evaluating Canadian Income Trusts as a potential high yield investment: The Dividend Detective’s Take on Canadian Income Trusts.

    • 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. The good news; 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 foreclose. The bad news; foreclosing 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.”

      The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.