High-yield assets are the part of any investment portfolio. The larger the part of high-yield vehicles in the pool of assets, the higher the overall risks. That is the basic principal of portfolio management. The other, brighter side of taking the risks is an increased profitability. The only question is whether you prefer high profit over safety or stability over high income. Yes, you will have to choose.
There are dozens of high-risk instruments and you may choose those ones you understand the most, based on assets’ market behavior, volatility, accessibility, and liquidity. Latter is an important aspect if you wish to have at least partial access to your money (means you are allowed to withdraw a certain amount in case you urgently need money). The most common high-risk assets are shares, high-yield bonds, Real Estate Investment trusts, penny stocks and some other types.
In this review we will take a closer look at two most popular (and most understandable by the majority of investors) vehicles: high-yield bonds and dividend paying stocks. Each asset has its advantages and cons and you better have the full picture of the tools you are going to invest in.
What types of high-yield shares is the best for you?
When it comes to investing in high-yield shares it often means investing in dividend stocks (or dividend-paying stocks).
Dividend paying stocks vary significantly in price and the rate of dividends, so first you should figure out your financial goals and then pick the appropriate stocks.
- DPS – Dividend per share with the formula of calculation:
Total Dividends /Total Shares = Dividend per Share
- IDS – Indicated Dividend per Share with the following formula:
Dividend Per Share x 4 = Indicated Dividend Per Share
- EPS – Earnings per Share:
Net Profit/Total Shares Outstanding = Earnings Per Share
Indicated Dividend Per Share/ Share Price = Yield
- Return on Equity (ROE):
Net Annual Profit /Average Annual Shareholder Equity = Return On Equity
There are several other coefficients you will need to calculate in order to figure out the whole picture and make a decision on buying or avoiding certain stocks.
The best (and most reliable and profitable) fields to invest in are stocks of Energy, Real Estate, Telecommunication, Utility companies.
What types of high-yield bonds are the most popular?
Contrary to common belief bonds are not always a tool of safe investment strategy. Some types of bonds can be as profitable as stocks and other equities. Here is the list of high-yield bonds which can become a highly profitable part of your portfolio.
- Straight cash bonds.
These are the most common types of bonds on the market which could bring pretty high yields to an investor. Straight cash bonds offer a fixed interest rate where the payments are usually made twice a year.
- Split coupon bonds.
This type of bonds can be advantageous for investors who are not willing to spend a fortune on buying assets. Split coupon bonds are sold at its initial face value with a discount with a low- interest rate. Over the certain period of time the value of split coupon bonds increases which brings benefit to an investor.
- Floating-rate and increasing rate notes
These bonds (called FRN and IRN) offer flexible (varying) interest rate which is constantly adjusted to the current interest rate benchmark. That means the interest rate which is paid to the bonds holder depends on a pool of certain macroeconomic factors. When factors go up, the rate follows accordingly and vice versa.
- Convertible bonds
These bonds provide a holder with the freedom to exchange papers for stocks, according to the terms of an Agreement. Take a note that convertible bonds allow the exchange only for stocks of the same Company that has emitted the bonds, while there is also “exchangeable bonds” which allow exchange for stock of any other company the holder prefers.
- Deferred-interest bonds
In a case of deferred-interest bonds, the holder doesn’t receive any coupon payments until the future date. Companies that emit this types of bonds benefit from having no need to make payments to bondholders during the certain (starting) period, so they can direct all funds on Company’s needs until the future date.
- Discount bonds (zero coupon bonds)
These are also popular bonds on the market, where the holder buys bonds with the significant discount and after the certain period of time, he sells the bonds back on their actual nominal price. The difference between discount and the nominal price is the profit of the bondholder.
How to determine whether the level of risk is acceptable for you?
There is a special term for the level of risk acceptance – “Risk Profile”. That level varies depending on the amount the certain investor is ready to lose in a case of the worst scenario.
You should calculate whether the amount “to be lost” can affect your well-being and lifestyle. If in a case of losing that money your financial situation will be affected significantly, you should lower your risk acceptance level.
Investing in high-yield instruments may increase your profit and overall efficiency of portfolio significantly and even double your money. On the other side, the level of risk rises proportionally to potential profit. If you consider yourself a risk taker, an aggressive portfolio with the lion part of high-yield vehicles would be the best option for you.