7 High Yield Investments
High Yield Investments For The Savvy Investor
It’s the ultimate goal for any investor. To be savvy enough when it comes to choosing investments that you end up with the highest return possible on your money.
Enter: the golden prize of investing - high-yield investments.
What are these seemingly elusive options for investors? Does high yield always have to mean high risk? Keep reading to find out everything you need to know to play in the same game the pros do. You too can be an investor who makes the most out of your money.
What Are High Yield Investments?
High-yield investments can offer investors a promising reward, usually in a fairly short time period. But they often come with (sometimes substantial) risk. Nothing is free, especially in the world of investing - but understanding how to evaluate the risk associated with any high yield investment can make all the difference in the world.
High-yield investments work by attracting investors looking to make a higher rate of return on their investment. Opportunities are generally fixed-income instruments or plans. And as noted, investors sometimes, depending on the investment type, need to be willing to assume a higher risk in order to enjoy the potential for a higher rate of return (known as yield).
High Yield Low-Risk Investments
But while it is true that a lot of high yield investment opportunities can involve a greater degree of risk, this is not always the case. There are some opportunities out there that have markedly less risk to the investor.
This is why it’s so important to really take the time to ensure you understand how returns are generated. You also want to learn about any potential factors that could ultimately negatively affect any return on your investment. Once you know both these things, you’re better-equipped to make a sound, educated decision about which type of investments - be they high yield high risk, high yield low risk or even high yield short term investments.
Learn about some of the more common types of high yield opportunities, at varying degrees of risk levels below. We’ll cover a couple of your safer-bet, low risk options; one high-risk opportunity (for those who like to play the more-risky side of things); and finally, we’ll look at a handful of the middle-of-the-road options, for those who find they’re just a bit more comfortable there.
Lower Risk: Preferred Stock
Preferred Stock is also issued by companies. This class of stock is actually more similar to a bond than it is to traditional stock in that it will pay shareholders dividends prior to common stock shareholders earning theirs. There are some benefits to Preferred Stocks, including enhanced bankruptcy protection.
If a company you have Preferred Stock in files bankruptcy, as a Preferred Stockholder, you’re better-protected and would be paid before common stockholders. Some investors love the Preferred Stock’s sweet spot of risk - falling somewhere between extremely low-risk bonds and the higher-risk actual stock market.
Lower Risk: Certificates of Deposit (CDs)
Certificate of Deposits (CDs) are very low-risk investments. The trade off for having less risk here is you lose access to your investment for a specific, predetermined length of time. Offered by banks, CDs are FDIC-insured, making them one of the safer investment options out there.
As a result of the drastically lower risk CDs carry, as you may expect, they also tend to have a fairly conservative return on your money. The rate of return is an established, guaranteed interest rate that will remain steady regardless of any outside factors (including interest rate volatility).
Higher Risk: Peer-to-Peer Lending
Peer-to-Peer Lending (commonly known as P2P loans) are unsecured loans, meaning the borrower doesn’t have to put up any collateral to gain access to funds. These are obviously higher risk opportunities for an investor, as there’s no guarantee on payment and little recourse should the borrower default on the loan.
Despite the high risk, Peer-to-Peer Lending has become increasingly popular in recent years, particularly given the rise in online companies making it easier for borrowers to find investors willing to assume the risk.
Medium Risk: Dividend-Paying Stocks
Dividend-paying stocks actually do carry risk similar to that of the stock market. But there’s a major difference between the two. Since Dividend-Paying Stocks will consistently pay out dividends, they’re recognized as being less volatile and relatively more stable than the actual stock market or some other investment options.
Smart investors understand they’ll need to choose among two strategies when it comes to Dividend-Paying Stocks.
- Invest for dividend yield – Means seeking out companies (such as consumer staples or utilities companies) that are willing to pay higher dividends.
- Invest for dividend growth – You may look toward a group of stocks known as Dividend Aristocrat, where dividend payout levels have steadily increased over the last decade. Though they may not be the highest pay out, they’re well-known for strong management and overall healthy performance.
Medium Risk: Equity REITs
Equity Real Estate Investment Trusts (REITs) are the more common type of REIT. They’re owned and operated actual physical properties (note this differs from Mortgage REITs, which are investments in mortgages and subsequent related assets). Equity REITs can be involved in all-things-real-estate, from acquisition, to property management, to renovation and building, to selling of income property.
Equity REITs generate money through rental income on their holdings. Depending on the actual REIT, you may be dealing with a broad or a segment-focused investment. Because revenue is based on collection of rent, Equity REITs tend to be pretty predictable and fairly financially stable.
Medium Risk: Corporate Bonds
Corporate Bonds are probably exactly what you’re thinking – bonds issued by a company or corporation. The goal of a Corporate Bond is to ultimately raise capital for a specific purpose. Often, the endgame is an attempt to finance daily operations or to make improvements to enhance business growth.
If you invest in Corporate Bonds, you’ll be paid interest, most often semi-annually, and the total face value will be repaid on a specified date when the bond matures. It’s important to research the ratings on any Corporate Bonds you’re considering.
Standard & Poor’s and Moody’s are outside, independent agencies that rate bonds. Any bond that’s rated BBB/Baa3 or lower is called a Junk Bond. These are generally not advisable-investments, as they carry a higher risk of defaulting. And that means you could lose your entire investment with no recourse.
There are two types of risk associated with Corporate Bonds - interest rates rising (which would result in a lower bond price) and of course you always assume the risk of default.
Medium Risk: Real Estate Crowdfunding
Real Estate Crowdfunding lets investors pool together money to invest in real estate opportunities. There are three components to Real Estate Crowdfunding. First, a sponsor finds and manages the investment. There is also the crowdfunding platform that’s used to generate interest and find investors. And finally, there’s the investor, who offers an investment of capital or a guarantee of some return on profit.
Real Estate Crowdfunding allows smaller individual initial investments from larger groups, which can make this investment more affordable for the masses.
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