High yield investing has become increasingly popular in recent years as investors seek higher returns in the low interest rate environment. Street Authority is a financial publishing company providing investing insights and recommendations, including on high yield investing. This article reviews Street Authority’s perspectives on high yield investing, analyzing the potential benefits and risks. By understanding the pros and cons, investors can make informed decisions about incorporating high yield assets into their portfolios.
High yield bonds provide attractive yield, but have higher risk
Street Authority points out that high yield bonds can provide much higher interest payments than investment grade bonds. For instance, bonds rated BB and below currently yield about 6%, far exceeding yields on Treasuries or AAA corporate bonds. However, with the higher yields comes higher risk, including greater credit risk, risk of default, and volatility risk. The tradeoff between yield and risk needs to be evaluated relative to an investor’s risk tolerance and portfolio structure.
High dividend stocks boost income, but raise concentration concerns
Street Authority also highlights high dividend paying stocks as an approach to boost portfolio income. Some stocks offer dividends yielding 5-10%, multiples above broader index yields. However, investing in individual high dividend stocks carries risks like concentration and exposure to troubled companies. Constructing a diversified portfolio of dividend payers or considering dividend ETFs can mitigate these risks.
MLPs and REITs provide tax advantages but complexities exist
Other high yield asset classes covered include MLPs (master limited partnerships) and REITs (real estate investment trusts). These can provide advantages such as tax-deferred income and high yields. However, Street Authority notes MLPs and REITs have complex tax considerations. Also, high payout ratios could force distribution cuts in the future. Assessing an MLP’s or REIT’s fundamentals and maintaining diversification are important.
Evaluate portfolio structure and risk exposures when investing for yield
In summary, Street Authority emphasizes evaluating overall portfolio structure when investing for higher yield. Consider exposures to credit, volatility, concentration risks, and how additional income would affect required returns. Create a balanced portfolio aligned with risk preferences. While higher yields may require compromising on risk, understand the tradeoffs involved rather than reaching for yield indiscriminately.
In reviewing Street Authority’s perspectives, high yield investing offers opportunities to boost portfolio income but also carries risks requiring thorough evaluation. Assessing risk exposures and diversification are key to successfully incorporating high yield assets.