Last year, there were 13,665,475 accredited investor households in the United States. This comes out to 10.6% of American households.
How are these investors controlling trillions of dollars in wealth? How can you become an accredited investor? One possible answer to both of these questions is high-yield investments.
Unfamiliar with the term? No worries. This guide has you covered.
What Are High-Yield Investments?
High-yield investments are financial tools that can lead to impressive returns for those who invest in them. The downside is that they involve major credit rating risks.
You can invest in these financial instruments through small-scale companies. Those who issue these investments will attract opportunists by offering high-interest rates compared to investment-grade bonds.
Why would high-interest rates attract investors? Because high-yield investments come with an increased return.
Along with small-scale companies, these are other issuers that may offer high-yield corporate bonds:
- Emerging companies
- Highly leveraged companies
- Companies under financial stress
Investors attracted to high-yield investments may be those looking for quality investments or those seeking a haven after the economy goes into recession.
Along with economical factors, a person looking to invest with high risk should consider the issuer, the features of the bond, and the movement of the market. Always understand the risk-return trade-off before making a decision.
Types of High-Yield Investments
Although high-yield corporate bonds are common, they aren’t the only high-yield investment opportunity. The other investments considered high-yield include the following:
Mortgage Real Estate Investment Trusts
Mortgage real estate investment trusts (REITs) make a profit in one of three different ways:
- Lending to property companies
- Purchasing mortgages
- Investing in mortgage-backed securities
Issuers of REITs are required to pay out 90% of the profits through dividends. This is a risky option because they are leveraged higher than equity REITs, meaning they borrow a lot more cash.
An investor is also at risk when interest rates rise. The returns of the REITs subtracted from the costs of borrowing begin to sink when interest rates go up.
You can buy and sell shares of closed-end funds (CEFs) on exchanges. However, you cannot issue new shares.
These types of investments involve using leverage to increase the amount of money there is to invest. This is why they are high-yield and increase the risk profile of an investor.
Purchasing CEFs involves a good amount of research and technicality. For example, you should always understand the share price and how it relates to the net asset value (NAV) of the fund. AKA the value of assets minus the liabilities.
The truth is that CEFs often have a large discrepancy between the NAV per share and the total share price. You’ll want to buy these shares at a discount to make a good deal.
Peer-to-peer lending or P2P loans are sought out by alternative asset investors. You can find these high-yield investments through an online portal where the platform automatically sets the market rate for loans.
Through the portal, you can connect to borrowers or investors alike.
You can individually fund a loan or pool more than one together. This means you can spread your money out if you’d like.
For example, if you want to lend small amounts to multiple investors you can do so. In contrast, you can lend a large amount to one person. The risk is that a borrower may not repay you what they owe.
Master Limited Partnerships
Master limited partnerships (MLP) involve partnerships that trade their income to investors in a public manner. However, through this instrument, investors won’t pay corporate tax rates.
A good amount of MLPs can be found in the energy infrastructure business. They tend to provide a higher yield for investors compared to dividend-paying stocks.
Although high yields are attractive, this form of investment became less desirable after the federal corporate tax cut in 2018. Now, investors may have to deal with tax problems such as filing returns in multiple states.
Benefits of High-Yield Investments
After understanding high-yield financial investments and the different types, you may be on your way to investing right now. If you’re not convinced that high yield investment opportunities are right for you, here are some benefits:
The most obvious benefit of high-yield investments is the possibility of a larger return. Because interest rates are increased, they offer a better return than investment-grade bonds.
A high-yield investor may receive turnaround opportunities because their credit rating improved.
When you have a higher return of income, you are more likely to improve your repayment record and cash flow management. Both factors are important considerations when your credit score is determined.
There is a low correlation between high-yield investments and investment-grade bonds or stocks. Yet, this isn’t a bad thing. In fact, because these investment opportunities don’t exactly correlate, adding high-yield bonds to an investment portfolio can reduce your risk.
Because high-yield investments are less likely to be affected by interest rate shifts, they counteract the assets that are sensitive to moving interest rates. Not only are you lessening the risk, but you are also diversifying your portfolio.
When you opt for a high-yield corporate bond, you are at an advantage if the company goes bankrupt. Those holding bonds are paid first during the liquidation process. Common stockholders are paid last.
This means there is more debt security with a high-yield corporate bond than there is with equity investments. If this were to occur, your portfolio is protected from a significant loss.
Are You a Risk-Taking Investor?
Even the average investor can become a risk-taking investor by understanding high-yield investments. High-yield investments with low obligations can offer diversification although they come with a higher risk.
Every investment opportunity is different so it is important to complete the necessary research. Before coming to a decision, understand the terms and involved risks.
If you want to maximize your income and reduce the volatility rate of your portfolio, these investments are great opportunities.
We offer high-yield investment opportunities you’ll want to be a part of. Contact us today to learn about our options.