High-yield investments offer the potential for additional returns, but high returns come with greater risks. When evaluating investments that offer high yields, they should be approached with a degree of skepticism. Do your research and learn how these investments generate their returns and the factors that might lead to increases or decreases in those returns. You should consider purchasing these investments only after understanding these factors, which may include financial health, industry competitors, and general economic conditions.
High-yield Bonds
High-yield bonds are issued by companies whose financial strength may not be entirely robust. Often referred to as “junk bonds,” they must offer higher yields than safer alternatives to attract investors. You can buy individual high-yield bonds, but most investors will find that high-yield bond mutual funds or exchange-traded funds (ETFs) are more attractive and diversified.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) earn money by lending to real estate companies, buying mortgages, and/or investing in mortgage-backed securities. They are obligated to pay 90% of their profits as dividends to shareholders in exchange for favorable tax treatment.
Closed-end Funds
Shares of closed-end funds (CEFs) are available for buying and selling on exchanges, but unlike mutual funds, closed-end funds are unable to issue new shares. Many closed-end funds use leverage to increase the money available for investment, which can contribute to higher potential returns and an increased investment profile.
Peer-to-Peer Lending
Investors looking for higher returns in alternative assets may consider investing in peer-to-peer (P2P) loans. An online platform connects investors with borrowers and provides a marketplace that sets the market rates for loans. These loans can be pooled together or funded individually by one investor, meaning you can lend small amounts to multiple people or a larger sum to one person. There is the risk that borrowers may not repay what they owe.
Master Limited Partnerships (MLPs)
Master limited partnerships (MLPs) are publicly traded partnerships that pass their income to investors without paying corporate taxes. Most MLPs are in the energy infrastructure sector, such as pipeline management, and can often provide higher yields to investors than dividend-paying stocks.
MLPs lost some of their tax advantages over C-corporations in 2018 after the Tax Cuts and Jobs Act, but they retained most of them. MLP shares tend to be less liquid than most other types of publicly traded securities, and MLPs can create tax headaches for investors: MLP shareholders must file a complex K-1 form and may have to file state income tax returns in all states where the MLP operates. Additionally, if you own MLP shares in an IRA account, you may have to pay federal taxes on what is known as unrelated business taxable income (UBTI).
The Balance does not provide tax, investment, financial, or legal advice. The information is presented without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of principal.
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Sources:
U.S. Securities and Exchange Commission. “Investor Bulletin: Real Estate Investment Trusts (REITs).” Page 1.
U.S.
Securities and Exchange Commission. “Updated Investor Bulletin: Master Limited Partnerships – an Introduction.”
Source: https://www.thebalancemoney.com/high-yield-investments-for-risk-takers-2388676
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