Yesterday we learned about bonds, which are small slices of debt. Today Michael Fischer defines stocks, or small slices of equity:
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The stock market has its own unique vocabulary, with “puts” and “calls”, “preferred stock” and “P/E ratios”, “dividends” and “spread”. I’ll cover more of these later, but for now here are some basic concepts.
Blue chip stocks are those from the oldest and largest companies, businesses like IBM and AT&T and Coca-Cola. They’re the backbones of the economy. Blue chip stocks are generally safe investments, though the potential returns may be lower. At the other extreme are penny stocks. These represent shares of new companies, or companies on shaky financial footing. Investing in penny stocks is highly speculative, carrying huge risk.
Growth stocks are from youngish companies that are — no surprise — growing rapidly. A value stock is one that investors believe may be trading at prices below market value. Large-cap stocks are from the biggest companies (blue chip stocks are all large-cap, I think). Small-cap stocks are from smaller companies.
Many established stocks pay dividends. As a company earns money, its board of directors will meet from time-to-time to decide what to do with the money. They may decide to return some of these earnings to the owners (the shareholders) in the form of dividends. Some stocks pay large dividends on a regular basis. These are called income stocks.
Tomorrow Michael describes stock market indexes; next week we move on to mutual funds.
The debt-to-equity ratio is one of many financial metrics that helps investors determine potential risks when looking to invest in certain stocks. There’s a relatively simple calculation and formula investors can use to reach the ratio.
Companies also use debt, also known as leverage, to help them accomplish business goals and finance operating costs. The ratio used to measure this leverage is called the debt-to-equity ratio (D/E).
What Is the Debt-to-Equity Ratio?
The debt-to-equity ratio is one of several metrics that you can use to evaluate individual stocks. At its simplest, the debt-to-equity ratio is a measure of how much debt it takes for a company to run its business.
It compares a company’s equity — how much value is locked up in its shares — to its debts. Another way of looking at it is as a measure of a company’s ability to cover its debts. For example, if a company were to liquidate its assets, would it be able to cover its debt? How much money would be left over for shareholders?
Investors often use the debt-to-equity ratio to determine how much risk a company has taken on, and in return, how risky it may be to invest in that company. After all, if a company goes under and can’t cover its debts, its shares could wind up worthless. 💡 Quick Tip: When people talk about investment risk, they mean the risk of losing money. Some investments are higher risk, some are lower. Be sure to bear this in mind when investing online.
What Is Leverage?
To understand the debt-to-equity ratio, it’s helpful to understand the concept of leverage. A business has two options when it comes to paying for operating costs: It can either use equity, or they can use debt, aka leverage.
The company can use the funds from this debt to buy equipment, inventory, or other assets, or to fund new projects or acquisitions. It can also serve as working capital in cyclical businesses during the periods when cash flow is low.
While it’s potentially risky to use leverage — a company might have to declare bankruptcy if it can’t pay its debt — it can also help a company grow beyond the limitation of its equity.
The term “leverage” reflects the hope that the company will be able to use a relatively small amount of debt to boost its growth and earnings. Wise use of debt can help companies build a good reputation with creditors, which, in turn, will allow them to borrow more money for potential future growth.
The Debt-to-Equity Ratio Formula
Calculating the debt-to-equity ratio is fairly straightforward. A good first step is to take the company’s total liabilities and divide it by shareholder equity. Here’s what the debt to equity ratio formula looks like:
D/E = Total Liabilities / Shareholders’ Equity
Here’s a closer look at the two components of the equation:
Total Liabilities
This component includes a company’s current and long-term liabilities. Current liabilities are the debts that a company will typically pay off within the year, including accounts payable. Long-term liabilities are debts whose maturity extends longer than a year. Think mortgages on buildings or long-term leases.
Equity
The equity component includes two portions: shareholder equity and retained earnings. Shareholder equity is the money investors have paid in exchange for shares of the company stock. Retained earnings are profits that the company holds onto that aren’t paid out in the form of dividends to shareholders.
Debt-to-Equity Example
To look at a simple example of a debt to equity formula, consider a company with total liabilities worth $100 million dollars and equity worth $85 million. Divide $100 million by $85 million and you’ll see that the company’s debt-to-equity ratio would be about 1.18.
When using a real-world debt to equity ratio formula, you’ll probably be able to find figures for both total liabilities and shareholder equity on a company’s balance sheet. Publicly traded companies will usually share their balance sheet along with their regular filings with the Securities and Exchange Commission (SEC).
What Is a Good Debt-to-Equity Ratio?
Once you’ve calculated a debt-to-equity ratio, how do you know whether that number is good or bad? As a very general rule of thumb, a good debt-to-equity ratio will equal about 1.0. However, the acceptable rate can vary by industry, and may depend on the overall economy. A higher debt-to-income ratio could be more risky in an economic downturn, for example, than during a boom.
Recommended: Investing During a Recession
For example, if a company, such as a manufacturer, requires a lot of capital to operate, it may need to take on a lot of debt to finance its operations. A company like this may have a debt equity ratio of about 2.0 or more.
Other companies that might have high ratios include those that face little competition and have strong market positions, and regulated companies, like utilities, that investors consider relatively low risk.
Companies that don’t need a lot of debt to operate may have debt-to-equity ratios below 1.0. For example, the service industry requires relatively little capital.
What Does a Company’s Debt-to-Equity Ratio Mean?
A debt-to-equity-ratio that’s high compared to others in a company’s given industry may indicate that that company is overleveraged and in a precarious position. Investors may want to shy away from companies that are overloaded on debt. And not only that, companies with a high debt-to-equity ratio may have a hard time working with other lenders, partners, or even suppliers, who may be afraid they won’t be paid back.
In some cases, creditors limit the debt-to-equity ratio a company can have as part of their lending agreement. Such an agreement prevents the borrower from taking on too much new debt, which could limit the original creditor’s ability to collect.
It is possible that the debt-to-equity ratio may be considered too low, as well, which is an indicator that a company is relying too heavily on its own equity to fund operations. In that case, investors may worry that the company isn’t taking advantage of potential growth opportunities.
Ultimately, businesses must strike an appropriate balance within their industry between financing with debt and financing with equity.
What Does It Mean for a Debt-to-Equity Ratio to Be Negative?
There could be several reasons for a negative debt-to-equity ratio, including:
• Interest rates are higher than the returns
• A negative net worth (more liabilities than assets)
• A financial loss after a large dividend payout
• Dividend payments that surpass investor’s equity in the firm
So, what does this mean for investors?
Negative debt equity ratios may tell investors that the company indicates investment risk and shows that the company is not financially stable. Therefore, investing in such a company may result in a loss for investors. 💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.
Which Industries Have High Debt-to-Equity Ratios?
The depository industry (banks and lenders) may have high debt-to-equity ratios. Because banks borrow funds to loan money to consumers, financial institutions usually have higher debt-to-equity ratios than other industries.
Other industries with high debt to equity ratios include:
• Non-depository credit institutions
• Insurance providers
• Hotels, rooming houses, camps, and other lodging places
• Transportation by air
• Railroad transportation
Effect of Debt-to-Equity Ratio on Stock Price
The debt-to-equity ratio can clue investors in on how stock prices may move. As a measure of leverage, debt-to-equity can show how aggressively a company is using debt to fund its growth.
The interest rates on business loans can be relatively low, and are tax deductible. That makes debt an attractive way to fund business, especially compared to the potential returns on the stock market. And sometimes an aggressive strategy can pay off.
For example, if a company takes on a lot of debt and then grows very quickly, its earnings could rise quickly. If earnings outstrip the cost of the debt, which includes interest payments, shareholders can benefit and stock prices may go up.
The opposite may also be true. A highly leveraged company could have high business risk. If earnings don’t outpace the debt’s cost, then shareholders may lose and stock prices may fall.
Having to make high debt payments can leave companies with less cash on hand to pay for growth, which can also hurt the company and shareholders. And a high debt-to-equity ratio can limit a company’s access to borrowing, which could limit its ability to grow.
Debt-to-Equity (D/E) Ratio vs the Gearing Ratio
The debt-to-equity ratio belongs to a family of ratios that investors can use to help them evaluate companies. These ratios are collectively known as gearing ratios.
Here’s a quick look at other gearing ratios you may encounter:
Equity Ratio
This ratio compares a company’s equity to its assets, showing how much of the company’s assets are funded by equity.
Debt Ratio
This looks at the total liabilities of a company in comparison to its total assets. On the surface, this may sound like the debt ratio formula is the same as the debt-to-equity ratio formula. However, the total debt ratio formula includes short-term assets and liabilities as part of the equation, which the debt-to-equity ratio discounts. Also, this ratio looks specifically at how much of a company’s assets are financed with debt.
Time Interest Earned
This ratio helps indicate whether a company has the ability to make interest payments on its debt, dividing earnings before interest and taxes (EBIT) by total interest. Most of the information needed to calculate these ratios appears on a company’s balance sheet, save for EBIT, which appears on its profit and loss statement.
How Businesses Use Debt-to-Equity Ratios
Businesses pay as much attention to debt-to-equity as individual investors. For example, if a company wants to take on new credit, they would likely want their debt-to-equity ratio to be favorable.
Banks and other lenders keep tabs on what healthy debt-to-equity ratios look like in a given industry. A debt-to-equity ratio that seems too high, especially compared to a company’s peers, might signal to potential lenders that the company isn’t in a good position to repay the debt.
Publicly traded companies that are in the midst of repurchasing stock may also want to control their debt-to-equity ratio. That’s because share buybacks are usually counted as risk, since they reduce the value of stockholder equity. As a result the equity side of the equation looks smaller and the debt side appears bigger.
How Can the Debt-to-Equity Ratio Be Used to Measure a Company’s Riskiness?
While acceptable debt to equity ratios vary by industry, investors can still use this ratio to identify companies in which they want to invest. First, however, it’s essential to understand the scope of the industry to fully grasp how the debt-to-equity ratio plays a role in assessing the company’s risk.
Many companies borrow money to maintain business operations — making it a typical practice for many businesses. For companies with steady and consistent cash flow, repaying debt happens rapidly. Also, because they repay debt quickly, these businesses will likely have solid credit, which allows them to borrow inexpensively from lenders.
Therefore, even if such companies have high debt-to-equity ratios, it doesn’t necessarily mean they are risky. For example, companies in the utility industry must borrow large sums of cash to purchase costly assets to maintain business operations. However, since they have high cash flows, paying off debt happens quickly and does not pose a huge risk to the company.
On the other hand, companies with low debt-to-equity ratios aren’t always a safe bet, either. For example, a company may not borrow any funds to support business operations, not because it doesn’t need to but because it doesn’t have enough capital to repay it promptly. This may mean that the company doesn’t have the potential for much growth.
IPOs and Debt-to-Equity Ratios
Many startups make high use of leverage to grow, and even plan to use the proceeds of an IPO to pay down their debt. The results of their IPO will determine their debt-to-equity ratio, as investors put a value on the company’s equity. So, it’s important for investors to consider debt when deciding whether they want to buy IPO stock.
The Limitations of Debt-to-Equity Ratios
Debt-to-equity ratio is just one piece of the puzzle when it comes to evaluating stocks. Whether the ratio is high or low is not the be all and end all of whether one should invest in a company. A deeper dive into a company’s financial structure can paint a fuller picture.
A company’s accounting policies can change the calculation of its debt-to-equity. For example, preferred stock is sometimes included as equity, but it has certain properties that can also make it seem a lot like debt. Specifically, preferred stock with dividend payment included as part of the stock agreement can cause the stock to take on some characteristics of debt, since the company has to pay dividends in the future.
If preferred stock appears on the debt side of the equation, a company’s debt-to-equity ratio may look riskier. If it’s included on the equity side, the ratio can look more favorable.
In some cases, companies can manipulate assets and liabilities to produce debt-to-equity ratios that are more favorable. Additionally, investors may want to keep an eye on interest rates.
If they’re low, it can make sense for companies to borrow more, which can inflate the debt-to-equity ratio, but may not actually be an indicator of bad tidings. Finally, the debt-to-equity ratio does not take into account when a debt is due. A debt due in the near term could have an outsized effect on the debt-to-equity ratio.
As a result of temporary imbalances like these, investors may want to compare debt-to-equity ratios from various time periods to get an idea of a company’s normal wage, or whether fluctuations are signaling more noteworthy movement within the company.
The Takeaway
Investors can use the debt-to-equity ratio to help determine potential risk before they buy a stock. As an individual investor you may choose to take an active or passive approach to investing and building a nest egg. The approach investors choose may depend on their goals and personal preferences.
Investors who are comfortable with a passive, hands-off approach may want to invest through index funds, or exchange-traded funds, which provide a diversified portfolio through a basket of investments. Investors who want to take a more hands-on approach to investing, choosing individual stocks, may take a look at the debt-to-equity ratio to help determine whether a company is a risky bet.
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A GRS reader dropped a line last weekend. “I want to invite you to the Diehard Organizational Meeting on Wednesday,” he said. “I’m new to the group but obviously we’re all believers of value of index funds and John Bogle’s investment philosophy.”
“Hope to see you there,” I replied.
I’m still new to investing, but my reading continues to point in the direction of index funds. (An index fund is a mutual fund designed to track a particular stock market index. FSMKX, for example, attempts to mimic the performance of the S&P 500 index.) Index funds were popularized by John Bogle, the founder and retired CEO of The Vanguard Group. Followers of Bogle’s investment philosophy call themselves Bogleheads or Diehards.
I’m not a Diehard (yet), but a chance to meet and learn from them was an offer I could not refuse.
The Diehards Seven of us gathered last night at a Portland coffeehouse. We’re all at different places in life, and we each have different investment goals and strategies:
Ron is retired. He derives his income from dividends and social security. His investments follow a conventional split: 60% equities (50% stock index funds, 10% real-estate investment trusts, a.k.a. REITs) and 40% fixed income (30% bonds and 10% cash).
J.D. is a middle-aged blogger. He recently eliminated his consumer debt, and is only now beginning to learn about investing. All of his retirement money is in stock index funds (though one of them is FFNOX, which includes a small portion in bonds).
Tony is learning about investing. He reads Get Rich Slowly (and is the one who invited me to the meeting). His portfolio is 80% equities (50% total stock market index, 15% international, 15% small-caps) and 20% other (10% REITs and 10% bonds).
Greg is also new to investing — Tony has been showing him the ropes. Greg is a lifelong saver and is not a risk-taker. He tries to max out his Roth IRA every year, putting his money in Vanguard’s STAR fund. Greg lives frugally in order to get the money to invest: he doesn’t have cable, and he doesn’t have internet.
Tim is a fee-based Certified Financial Planner. He believes that everyone’s situation and circumstances are different. He likes to see the different approaches each person takes to financial planning. His own investments are 50% in stocks, 40% in fixed income (including 20% in TIPS, Treasury inflation-protected securities), and 10% in what he calls “alternative investments”, such as REITs and commodities.
Tom just moved to Vanguard index funds this year. He wants to do a lot of intense research over the next couple of years, find a plan that works, and then put it on auto-pilot. Like Ron, he has 60% invested in equities and 40% in fixed income.
Bruce teaches Certified Financial Planner courses at a nearby university. His personal investments are interesting. He’s an income investor. He doesn’t care how the share price moves. He cares about the income, because that’s how he pays his bills. His portfolio contains 60% “income securities” (REITs, preferred stock, utilities) and 40% conventional equities (in other words, normal stocks). “This is not what I teach,” he said as he explained his methods.
Profiting from shared wisdom As we introduced ourselves, others asked questions about our backgrounds, and we had tangential conversations about a variety of topics. We talked about health insurance. We talked about preferred stock. We talked about financial planning.
It seemed to me, though, that we were mostly discussing facts and figures. “What role do you think behavior plays in financial planning?” I asked.
“It’s starting to play a bigger role,” said Bruce. “Financial planning is a huge topic. If you want to be a competent advisor, you have to know it all. The coursework is structured as if there are right answers and there are wrong answers, but then you get out into the real world and you realize that’s not true.”
“There’s no one right answer,” said Tim. “It’s a broad subject.”
I also mentioned that the Doom-and-Gloomers (like Peter Schiff) are starting to get to me. “Those folks come out every time the economy goes bad,” Bruce said. “They bubble to the top. You just have to ignore them.”
I left the meeting with two pages of notes and tons of information, not just for the blog, but for myself. I learned about George Kinder and his concept of life planning (see video below). I learned about Sheryl Garrett, and her goal of making financial advice accessible to all people. I learned a little more about income investing (a subject that interests me).
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I’m grateful to Tony for inviting me to join this group, and I look forward to additional meetings in the future.
Strength in numbers It’s certainly possible to learn about investing from books and blogs and magazines. But I think meeting and exchanging ideas with other people adds a new dimension to the subject.
If you’re interested in sharing and learning about index fund investing, check the list of Diehards local chapters to find a meeting in your area. If you can’t find a group nearby, you can still chat with hundreds of other like-minded folks at the Bogleheads investment forum.
You might also consider joining the American Association of Individual Investors, a non-profit founded in 1978 to provide individual investors — people like you and me — with tools and knowledge to better approach the stock market. This organization also has local meetings. (Here’s info about the next meeting of the Portland chapter [PDF], which I hope to attend.) The downside to the AAII is that everything costs money.
There may be other similar groups in your city. One of the men at tonight’s meeting mentioned that he’s involved in a couple of other organizations that meet regularly to discuss saving and investing. These kinds of gatherings are excellent ways to meet other people, and to learn from their successes and failures. They allow you to profit from shared wisdom.
The Federal Housing Finance Agency (FHFA) is sounding the alarm over a high risk-based capital shortfall for Fannie Mae and Freddie Mac, exceeding their risk-based requirements and elevated operational risks. This is according to FHFA’s 2022 Annual Report to Congress published earlier this month.
“Despite considerable growth in each Enterprise’s loss-absorbing capacity (net worth), available capital remains in deficit, in large part because the Senior Preferred Stock issued by the Enterprises is excluded from regulatory capital,” the report reads. “The Enterprises remain undercapitalized, with a combined adjusted total risk-based capital shortfall of $421 billion, which exceeds their adjusted total risk-based capital requirements and buffers due to the Enterprises’ accumulated deficits.”
Credit risk management continues to be a priority at the GSEs, particularly due to the impacts of the COVID-19 coronavirus pandemic that is partially mitigated by borrowers’ exits from forbearance programs, the report explained. High levels of home price appreciation are also helping, but exposure to nonbank mortgage companies increased in 2021 due to increased sales to the GSEs.
Operational risks to the GSEs are also “elevated” due to the persistent presence of cybersecurity threats. However, some steps have been taken to improve the positions of the GSEs, including updated minimum financial eligibility requirements for Ginnie Mae and FHFA announced last August.
The report also makes a series of legislative recommendations related to the GSE’s regulatory capital for policies that cannot be implemented legislatively, including updates to FHFA’s authorizing statute, and additional flexibilities Congress could grant that would streamline the regulation of capital.
“In 2008, Congress amended FHFA’s authorizing statute to give FHFA relatively broad authority to prescribe regulatory capital requirements for the Enterprises,” the report reads. “The 2008 amendments, however, did not update the outdated definitions of regulatory capital from the original authorizing statute.”
Unlike the U.S. banking framework, the report points out that applicable statutory definitions include, “without limits, certain capital elements that tend to have less loss-absorbing capacity during a period of financial stress, such as deferred tax assets (DTAs).”
As it currently stands, FHFA’s authorizing statute “does not expressly permit FHFA to adjust the statutory capital definitions by regulation,” the report states.
FHFA’s Enterprise Regulatory Capital Framework (ECRF) as established in 2020 and amended in 2022 does mitigate risks associated with existing statutory definitions, supplemental requirements add “additional complexity to an already complex capital framework,” the report says.
“If Congress were to give FHFA the same flexibility as the federal banking regulators by amending or removing the statutory capital definitions, FHFA could streamline the capital regulation,” the report explains.
I love to learn. That’s part of what makes me who I am. And so I spend large chunks of time pursuing passions like astronomy and Spanish…and investing. Sometimes I’m asked if I have a method for picking up new skills and new knowledge. “Not really,” I say. “I just try to keep an open mind and to absorb as much information as possible.”
As you’ve probably noticed around here, I try to never say “THIS IS THE WAY THINGS ARE!”. Sure, at any give time I have a set of beliefs — I currently believe index funds are the best investment for me (and many others), for example — but I’m never so locked into any given belief that I’m unwilling to change my mind.
So, I continue to explore opposing viewpoints. I listen to new ideas. And, every once in a while, one of these new ideas will stick, will change the way I think. That’s the way I learn.
Passive investing — with an open mind For me, one of the best ways to learn about money is by listening to others who have been successful. I’ve found it profitable to seek out mentors, for instance. Plus, I like to gather with groups of like-minded folks to share ideas. So, once or twice a year, I attend the meeting of a local investment group — the Diehards.
I’ve written about the Diehards a couple of times before (2008, 2010). This is a report on the most recent meeting.
Note: For those of you who aren’t familiar, Diehards (also called Bogleheads) are fans of indexed mutual funds — funds that track the movement of stock market indexes — as popularized by John Bogle, the founder and retired CEO of The Vanguard Group. These Diehards discuss investing in the Bogleheads investment forum. From my experience, they’re friendly, smart, and knowledgeable people.
As followers of John Bogle, you might expect most of these folks to be passive investors, but that’s just not the case. Many of these folks are actually active investors (though everyone seems to make decisions informed by the principles of passive investing). This group has a wide variety of approaches to investing based on their own goals, risk tolerance, and opinions about the economy. But each person comes to these meetings ready to learn more about investing, and to share their stories.
Keeping a level head Most members of the group are retired. I’m not. I feel like this gives me an advantage. I’m able to pick the brains of people who are twenty or thirty years older than I am. For instance, every meeting I learn something new from Bruce about preferred stock.
Bruce teaches in the financial planning program at a local university. He’s a vocal advocate of preferred stocks, which are a sort of hybrid between bonds and common stocks. “I don’t need capital appreciation,” he says. “I want capital preservation. And income.” It’s all Greek to me, but it’s also intriguing. Now I want to learn more about preferreds. (To find out more about preferred stocks, check out Quantum Online — I’m going to!)
At this meeting, I sat next to a woman named Kris (just like my wife). At the last meeting I attended, she stressed the importance of always being a saver. At this meeting, Kris said she no longer worries about market downturns. “I’ve been investing since 1968,” she said. “I’ve been through this three or four times now, depending on how you count. I don’t like when the market drops, but I also know that if I wait five years, then things will be fine.”
Loren, too, tries to keep an even keel when it comes to investing. “I don’t try to make my rebalancing too accurate,” he said. “I’ve never been sure what the right balance is in the first place!”
Andy says that he does his best to follow the investment mantra “buy low, sell high”. “When something’s down, I buy it,” he told us. “It’s hard — it goes against human nature — but I do it. I try to stay broadly diversified.”
This led the discussion back to Harry Browne’s permanent portfolio. There are many ways to approach safe, steady investing, but Brown has some specific recommendations for his own Permanent Portfolio:
25% in U.S. stocks, to provide a strong return during times of prosperity.
25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation.
25% in cash in order to hedge against periods of “tight money” or recession.
25% in precious metals (gold, specifically) in order to provide protection during periods of inflation.
Because this asset allocation is diversified, the entire portfolio performs well under most circumstances. One of our members practices this investment philosophy, and has done well with it. He actually hopes to write a book providing a modern update of the technique.
Near the end of the meeting, Bruce pointed out that a recent article in the Journal of Financial Planning once again showed the terrible, terrible drag of expenses on the returns of the average investor. (You can read the article here.)
Strength in numbers It’s certainly possible to learn about investing from books and blogs and magazines. But I think meeting and exchanging ideas with other people adds a new dimension to the subject. That’s why I think meetings like this are invaluable. They’re a chance to exchange ideas with fellow investors, and to profit from their success and mistakes.
I highly recommend finding a similar group in your area. There’s no need to be intimidated. It’s fine to show up and just listen if you feel like you don’t have anything to contribute. I feel lost a lot of the time, but the more often I do things like this, the less lost I become.
In Best Low-Risk Investments for 2023, I provided a comprehensive list of low-risk investments with predictable returns. But it’s precisely because those returns are low-risk that they also provide relatively low returns.
In this article, we’re going to look at high-yield investments, many of which involve a higher degree of risk but are also likely to provide higher returns.
True enough, low-risk investments are the right investment solution for anyone who’s looking to preserve capital and still earn some income.
But if you’re more interested in the income side of an investment, accepting a bit of risk can produce significantly higher returns. And at the same time, these investments will generally be less risky than growth stocks and other high-risk/high-reward investments.
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Determine How Much Risk You’re Willing to Take On
The risk we’re talking about with these high-yield investments is the potential for you to lose money. As is true when investing in any asset, you need to begin by determining how much you’re willing to risk in the pursuit of higher returns.
Chasing “high-yield returns” will make you broke if you don’t have clear financial goals you’re working towards.
I’m going to present a large number of high-yield investments, each with its own degree of risk. The purpose is to help you evaluate the risk/reward potential of these investments when selecting the ones that will be right for you.
If you’re looking for investments that are completely safe, you should favor one or more of the highly liquid, low-yield vehicles covered in Best Low-Risk Investments for 2023. In this article, we’re going to be going for something a little bit different. As such, please note that this is not in any way a blanket recommendation of any particular investment.
Best High-Yield Investments for 2023
Table of Contents
Below is my list of the 18 best high-yield investments for 2023. They’re not ranked or listed in order of importance. That’s because each is a unique investment class that you will need to carefully evaluate for suitability within your own portfolio.
Be sure that any investment you do choose will be likely to provide the return you expect at an acceptable risk level for your own personal risk tolerance.
1. Treasury Inflation-Protected Securities (TIPS)
Let’s start with this one, if only because it’s on just about every list of high-yield investments, especially in the current environment of rising inflation. It may not actually be the best high-yield investment, but it does have its virtues and shouldn’t be overlooked.
Basically, TIPS are securities issued by the U.S. Treasury that are designed to accommodate inflation. They do pay regular interest, though it’s typically lower than the rate paid on ordinary Treasury securities of similar terms. The bonds are available with a minimum investment of $100, in terms of five, 10, and 30 years. And since they’re fully backed by the U.S. government, you are assured of receiving the full principal value if you hold a security until maturity.
But the real benefit—and the primary advantage—of these securities is the inflation principal additions. Each year, the Treasury will add an amount to the bond principal that’s commensurate with changes in the Consumer Price Index (CPI).
Fortunately, while the principal will be added when the CPI rises (as it nearly always does), none will be deducted if the index goes negative.
You can purchase TIPS through the U.S. Treasury’s investment portal, Treasury Direct. You can also hold the securities as well as redeem them on the same platform. There are no commissions or fees when buying securities.
On the downside, TIPS are purely a play on inflation since the base rates are fairly low. And while the principal additions will keep you even with inflation, you should know that they are taxable in the year received.
Still, TIPS are an excellent low-risk, high-yield investment during times of rising inflation—like now.
2. I Bonds
If you’re looking for a true low-risk, high-yield investment, look no further than Series I bonds. With the current surge in inflation, these bonds have become incredibly popular, though they are limited.
I bonds are currently paying 6.89%. They can be purchased electronically in denominations as little as $25. However, you are limited to purchasing no more than $10,000 in I bonds per calendar year. Since they are issued by the U.S. Treasury, they’re fully protected by the U.S. government. You can purchase them through the Treasury Department’s investment portal, TreasuryDirect.gov.
“The cash in my savings account is on fire,” groans Scott Lieberman, Founder of Touchdown Money. “Inflation has my money in flames, each month incinerating more and more. To defend against this, I purchased an I bond. When I decide to get my money back, the I bond will have been protected against inflation by being worth more than what I bought it for. I highly recommend getting yourself a super safe Series I bond with money you can stash away for at least one year.”
You may not be able to put your entire bond portfolio into Series I bonds. But just a small investment, at nearly 10%, can increase the overall return on your bond allocation.
3. Corporate Bonds
The average rate of return on a bank savings account is 0.33%. The average rate on a money market account is 0.09%, and 0.25% on a 12-month CD.
Now, there are some banks paying higher rates, but generally only in the 1%-plus range.
If you want higher returns on your fixed income portfolio, and you’re willing to accept a moderate level of risk, you can invest in corporate bonds. Not only do they pay higher rates than banks, but you can lock in those higher rates for many years.
For example, the average current yield on a AAA-rated corporate bond is 4.55%. Now that’s the rate for AAA bonds, which are the highest-rated securities. You can get even higher rates on bonds with lower ratings, which we will cover in the next section.
Corporate bonds sell in face amounts of $1,000, though the price may be higher or lower depending on where interest rates are. If you choose to buy individual corporate bonds, expect to buy them in lots of ten. That means you’ll likely need to invest $10,000 in a single issue. Brokers will typically charge a small per-bond fee on purchase and sale.
An alternative may be to take advantage of corporate bond funds. That will give you an opportunity to invest in a portfolio of bonds for as little as the price of one share of an ETF. And because they are ETFs, they can usually be bought and sold commission free.
You can typically purchase corporate bonds and bond funds through popular stock brokers, like Zacks Trade, TD Ameritrade.
Corporate Bond Risk
Be aware that the value of corporate bonds, particularly those with maturities greater than 10 years, can fall if interest rates rise. Conversely, the value of the bonds can rise if interest rates fall.
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4. High-Yield Bonds
In the previous section we talked about how interest rates on corporate bonds vary based on each bond issue’s rating. A AAA bond, being the safest, has the lowest yield. But a riskier bond, such as one rated BBB, will provide a higher rate of return.
If you’re looking to earn higher interest than you can with investment-grade corporate bonds, you can get those returns with so-called high-yield bonds. Because they have a lower rating, they pay higher interest, sometimes much higher.
The average yield on high-yield bonds is 8.29%. But that’s just an average. The yield on a bond rated B will be higher than one rated BB.
You should also be aware that, in addition to potential market value declines due to rising interest rates, high-yield bonds are more likely to default than investment-grade bonds. That’s why they pay higher interest rates. (They used to call these bonds “junk bonds,” but that kind of description is a marketing disaster.) Because of those twin risks, junk bonds should occupy only a small corner of your fixed-income portfolio.
High Yield Bond Risk
In a rapidly rising interest rate environment, high-yield bonds are more likely to default.
High-yield bonds can be purchased under similar terms and in the same places where you can trade corporate bonds. There are also ETFs that specialize in high-yield bonds and will be a better choice for most investors, since they will include diversification across many different bond issues.
5. Municipal Bonds
Just as corporations and the U.S. Treasury issue bonds, so do state and local governments. These are referred to as municipal bonds. They work much like other bond types, particularly corporates. They can be purchased in similar denominations through online brokers.
The main advantage enjoyed by municipal bonds is their tax-exempt status for federal income tax purposes. And if you purchase a municipal bond issued by your home state, or a municipality within that state, the interest will also be tax-exempt for state income tax purposes.
That makes municipal bonds an excellent source of tax-exempt income in a nonretirement account. (Because retirement accounts are tax-sheltered, it makes little sense to include municipal bonds in those accounts.)
Municipal bond rates are currently hovering just above 3% for AAA-rated bonds. And while that’s an impressive return by itself, it masks an even higher yield.
Because of their tax-exempt status, the effective yield on municipal bonds will be higher than the note rate. For example, if your combined federal and state marginal income tax rates are 25%, the effective yield on a municipal bond paying 3% will be 4%. That gives an effective rate comparable with AAA-rated corporate bonds.
Municipal bonds, like other bonds, are subject to market value fluctuations due to interest rate changes. And while it’s rare, there have been occasional defaults on these bonds.
Like corporate bonds, municipal bonds carry ratings that affect the interest rates they pay. You can investigate bond ratings through sources like Standard & Poor’s, Moody’s, and Fitch.
Fund
Symbol
Type
Current Yield
5 Average Annual Return
Vanguard Inflation-Protected Securities Fund
VIPSX
TIPS
0.06%
3.02%
SPDR® Portfolio Interm Term Corp Bond ETF
SPIB
Corporate
4.38%
1.44%
iShares Interest Rate Hedged High Yield Bond ETF
HYGH
High-Yield
5.19%
2.02%
Invesco VRDO Tax-Free ETF (PVI)
PVI
Municipal
0.53%
0.56%
6. Longer Term Certificates of Deposit (CDs)
This is another investment that falls under the low risk/relatively high return classification. As interest rates have risen in recent months, rates have crept up on certificates of deposit. Unlike just one year ago, CDs now merit consideration.
But the key is to invest in certificates with longer terms.
“Another lower-risk option is to consider a Certificate of Deposit (CD),” advises Lance C. Steiner, CFP at Buckingham Advisors. “Banks, credit unions, and many other financial institutions offer CDs with maturities ranging from 6 months to 60 months. Currently, a 6-month CD may pay between 0.75% and 1.25% where a 24-month CD may pay between 2.20% and 3.00%. We suggest considering a short-term ladder since interest rates are expected to continue rising.” (Stated interest rates for the high-yield savings and CDs were obtained at bankrate.com.)
Most banks offer certificates of deposit with terms as long as five years. Those typically have the highest yields.
But the longer term does involve at least a moderate level of risk. If you invest in a CD for five years that’s currently paying 3%, the risk is that interest rates will continue rising. If they do, you’ll miss out on the higher returns available on newer certificates. But the risk is still low overall since the bank guarantees to repay 100% of your principle upon certificate maturity.
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7. Peer-to-Peer (P2P) Lending
Do you know how banks borrow from you—at 1% interest—then loan the same money to your neighbor at rates sometimes as high as 20%? It’s quite a racket, and a profitable one at that.
But do you also know that you have the same opportunity as a bank? It’s an investing process known as peer-to-peer lending, or P2P for short.
P2P lending essentially eliminates the bank. As an investor, you’ll provide the funds for borrowers on a P2P platform. Most of these loans will be in the form of personal loans for a variety of purposes. But some can also be business loans, medical loans, and for other more specific purposes.
As an investor/lender, you get to keep more of the interest rate return on those loans. You can invest easily through online P2P platforms.
One popular example is Prosper. They offer primarily personal loans in amounts ranging between $2,000 and $40,000. You can invest in small slivers of these loans, referred to as “notes.” Notes can be purchased for as little as $25.
That small denomination will make it possible to diversify your investment across many different loans. You can even choose the loans you will invest in based on borrower credit scores, income, loan terms, and purposes.
Prosper, which has managed $20 billion in P2P loans since 2005, claims a historical average return of 5.7%. That’s a high rate of return on what is essentially a fixed-income investment. But that’s because there exists the possibility of loss due to borrower default.
However, you can minimize the likelihood of default by carefully choosing borrower loan quality. That means focusing on borrowers with higher credit scores, incomes, and more conservative loan purposes (like debt consolidation).
8. Real Estate Investment Trusts (REITs)
REITs are an excellent way to participate in real estate investment, and the return it provides, without large amounts of capital or the need to manage properties. They’re publicly traded, closed-end investment funds that can be bought and sold on major stock exchanges. They invest primarily in commercial real estate, like office buildings, retail space, and large apartment complexes.
If you’re planning to invest in a REIT, you should be aware that there are three different types.
“Equity REITs purchase commercial, industrial, or residential real estate properties,” reports Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University and co-author of several books, including The Tools and Techniques Of Investment Planning, Strategic Value Investing and Investment Banking for Dummies. “Income is derived primarily from the rental on the properties, as well as from the sale of properties that have increased in value. Mortgage REITs invest in property mortgages. The income is primarily from the interest they earn on the mortgage loans. Hybrid REITs invest both directly in property and in mortgages on properties.”
Johnson also cautions:
“Investors should understand that equity REITs are more like stocks and mortgage REITs are more like bonds. Hybrid REITs are like a mix of stocks and bonds.”
Mortgage REITs, in particular, are an excellent way to earn steady dividend income without being closely tied to the stock market.
Examples of specific REITs are listed in the table below (source: Kiplinger):
REIT
Equity or Mortgage
Property Type
Dividend Yield
12 Month Return
Rexford Industrial Realty
REXR
Industrial warehouse space
2.02%
2.21%
Sun Communities
SUI
Manufactured housing, RVs, resorts, marinas
2.19%
-14.71%
American Tower
AMT
Multi-tenant cell towers
2.13%
-9.00%
Prologis
PLD
Industrial real estate
2.49%
-0.77%
Camden Property Trust
CPT
Apartment complexes
2.77%
-7.74%
Alexandria Real Estate Equities
ARE
Research Properties
3.14%
-23.72%
Digital Realty Trust
DLR
Data centers
3.83%
-17.72%
9. Real Estate Crowdfunding
If you prefer direct investment in a property of your choice, rather than a portfolio, you can invest in real estate crowdfunding. You invest your money, but management of the property will be handled by professionals. With real estate crowdfunding, you can pick out individual properties, or invest in nonpublic REITs that invest in very specific portfolios.
One of the best examples of real estate crowdfunding is Fundrise. That’s because you can invest with as little as $500 or create a customized portfolio with no more than $1,000. Not only does Fundrise charge low fees, but they also have multiple investment options. You can start small in managed investments, and eventually trade up to investing in individual deals.
One thing to be aware of with real estate crowdfunding is that many require accredited investor status. That means being high income, high net worth, or both. If you are an accredited investor, you’ll have many more choices in the real estate crowdfunding space.
If you are not an accredited investor, that doesn’t mean you’ll be prevented from investing in this asset class. Part of the reason why Fundrise is so popular is that they don’t require accredited investor status. There are other real estate crowdfunding platforms that do the same.
Just be careful if you want to invest in real estate through real estate crowdfunding platforms. You will be expected to tie your money up for several years, and early redemption is often not possible. And like most investments, there is the possibility of losing some or all your investment principal.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
10. Physical Real Estate
We’ve talked about investing in real estate through REITs and real estate crowdfunding. But you can also invest directly in physical property, including residential property or even commercial.
Owning real estate outright means you have complete control over the investment. And since real estate is a large-dollar investment, the potential returns are also large.
For starters, average annual returns on real estate are impressive. They’re even comparable to stocks. Residential real estate has generated average returns of 10.6%, while commercial property has returned an average of 9.5%.
Next, real estate has the potential to generate income from two directions, from rental income and capital gains. But because of high property values in many markets around the country, it will be difficult to purchase real estate that will produce a positive cash flow, at least in the first few years.
Generally speaking, capital gains are where the richest returns come from. Property purchased today could double or even triple in 20 years, creating a huge windfall. And this will be a long-term capital gain, to get the benefit of a lower tax bite.
Finally, there’s the leverage factor. You can typically purchase an investment property with a 20% down payment. That means you can purchase a $500,000 property with $100,000 out-of-pocket.
By calculating your capital gains on your upfront investment, the returns are truly staggering. If the $500,000 property doubles to $1 million in 20 years, the $500,000 profit generated will produce a 500% gain on your $100,000 investment.
On the negative side, real estate is certainly a very long-term investment. It also comes with high transaction fees, often as high as 10% of the sale price. And not only will it require a large down payment up front, but also substantial investment of time managing the property.
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11. High Dividend Stocks
“The best high-yield investment is dividend stocks,” declares Harry Turner, Founder at The Sovereign Investor. “While there is no guaranteed return with stocks, over the long term stocks have outperformed other investments such as bonds and real estate. Among stocks, dividend-paying stocks have outperformed non-dividend paying stocks by more than 2 percentage points per year on average over the last century. In addition, dividend stocks tend to be less volatile than non-dividend paying stocks, meaning they are less likely to lose value in downturns.”
You can certainly invest in individual stocks that pay high dividends. But a less risky way to do it, and one that will avoid individual stock selection, is to invest through a fund.
One of the most popular is the ProShares S&P 500 Dividend Aristocrat ETF (NOBL). It has provided a return of 1.67% in the 12 months ending May 31, and an average of 12.33% per year since the fund began in October 2013. The fund currently has a 1.92% dividend yield.
The so-called Dividend Aristocrats are popular because they represent 60+ S&P 500 companies, with a history of increasing their dividends for at least the past 25 years.
“Dividend Stocks are an excellent way to earn some quality yield on your investments while simultaneously keeping inflation at bay,” advises Lyle Solomon, Principal Attorney at Oak View Law Group, one of the largest law firms in America. “Dividends are usually paid out by well-established and successful companies that no longer need to reinvest all of the profits back into the business.”
It gets better. “These companies and their stocks are safer to invest in owing to their stature, large customer base, and hold over the markets,” adds Solomon. “The best part about dividend stocks is that many of these companies increase dividends year on year.”
The table below shows some popular dividend-paying stocks. Each is a so-called “Dividend Aristocrat”, which means it’s part of the S&P 500 and has increased its dividend in each of at least the past 25 years.
Company
Symbol
Dividend
Dividend Yield
AbbVie
ABBV
$5.64
3.80%
Armcor PLC
AMCR
$0.48
3.81%
Chevron
CVX
$5.68
3.94%
ExxonMobil
XOM
$3.52
4.04%
IBM
IBM
$6.60
5.15%
Realty Income Corp
O
$2.97
4.16%
Walgreen Boots Alliance
WBA
$1.92
4.97%
12. Preferred Stocks
Preferred stocks are a very specific type of dividend stock. Just like common stock, preferred stock represents an interest in a publicly traded company. They’re often thought of as something of a hybrid between stocks and bonds because they contain elements of both.
Though common stocks can pay dividends, they don’t always. Preferred stocks on the other hand, always pay dividends. Those dividends can be either a fixed amount or based on a variable dividend formula. For example, a company can base the dividend payout on a recognized index, like the LIBOR (London Inter-Bank Offered Rate). The percentage of dividend payout will then change as the index rate does.
Preferred stocks have two major advantages over common stock. First, as “preferred” securities, they have a priority on dividend payments. A company is required to pay their preferred shareholders dividends ahead of common stockholders. Second, preferred stocks have higher dividend yields than common stocks in the same company.
You can purchase preferred stock through online brokers, some of which are listed under “Growth Stocks” below.
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Preferred Stock Caveats
The disadvantage of preferred stocks is that they don’t entitle the holder to vote in corporate elections. But some preferred stocks offer a conversion option. You can exchange your preferred shares for a specific number of common stock shares in the company. Since the conversion will likely be exercised when the price of the common shares takes a big jump, there’s the potential for large capital gains—in addition to the higher dividend.
Be aware that preferred stocks can also be callable. That means the company can authorize the repurchase of the stock at its discretion. Most will likely do that at a time when interest rates are falling, and they no longer want to pay a higher dividend on the preferred stock.
Preferred stock may also have a maturity date, which is typically 30–40 years after its original issuance. The company will typically redeem the shares at the original issue price, eliminating the possibility of capital gains.
Not all companies issue preferred stock. If you choose this investment, be sure it’s with a company that’s well-established and has strong financials. You should also pay close attention to the details of the issuance, including and especially any callability provisions, dividend formulas, and maturity dates.
13. Growth Stocks
This sector is likely the highest risk investment on this list. But it also may be the one with the highest yield, at least over the long term. That’s why we’re including it on this list.
Based on the S&P 500 index, stocks have returned an average of 10% per year for the past 50 years. But it is important to realize that’s only an average. The market may rise 40% one year, then fall 20% the next. To be successful with this investment, you must be committed for the long haul, up to and including several decades.
And because of the potential wide swings, growth stocks are not recommended for funds that will be needed within the next few years. In general, growth stocks work best for retirement plans. That’s where they’ll have the necessary decades to build and compound.
Since most of the return on growth stocks is from capital gains, you’ll get the benefit of lower long-term capital gains tax rates, at least with securities held in a taxable account. (The better news is capital gains on investments held in retirement accounts are tax-deferred until retirement.)
You can choose to invest in individual stocks, but that’s a fairly high-maintenance undertaking. A better way may be to simply invest in ETFs tied to popular indexes. For example, ETFs based on the S&P 500 are very popular among investors.
You can purchase growth stocks and growth stock ETFs commission free with brokers like M1 Finance, Zacks Trade, Wealthsimple.
14. Annuities
Annuities are something like creating your own private pension. It’s an investment contract you take with an insurance company, in which you invest a certain amount of money in exchange for a specific income stream. They can be an excellent source of high yields because the return is locked in by the contract.
Annuities come in many different varieties. Two major classifications are immediate and deferred annuities. As the name implies, immediate annuities begin paying an income stream shortly after the contract begins.
Deferred annuities work something like retirement plans. You may deposit a fixed amount of money with the insurance company upfront or make regular installments. In either case, income payments will begin at a specified point in the future.
With deferred annuities, the income earned within the plan is tax-deferred and paid upon withdrawal. But unlike retirement accounts, annuity contributions are not tax-deductible. Investment returns can either be fixed-rate or variable-rate, depending on the specific annuity setup.
While annuities are an excellent idea and concept, the wide variety of plans as well as the many insurance companies and agents offering them, make them a potential minefield. For example, many annuities are riddled with high fees and are subject to limited withdrawal options.
Because they contain so many moving parts, any annuity contracts you plan to enter into should be carefully reviewed. Pay close attention to all the details, including the small ones. It is, after all, a contract, and therefore legally binding. For that reason, you may want to have a potential annuity reviewed by an attorney before finalizing the deal.
15. Alternative Investments
Alternative investments cover a lot of territory. Examples include precious metals, commodities, private equity, art and collectibles, and digital assets. These fall more in the category of high risk/potential high reward, and you should proceed very carefully and with only the smallest slice of your portfolio.
To simplify the process of selecting alternative assets, you can invest through platforms such as Yieldstreet. With a single cash investment, you can invest in multiple alternatives.
“Investors can purchase real estate directly on Yieldstreet, through fractionalized investments in single deals,” offers Milind Mehere, Founder & Chief Executive Officer at Yieldstreet. “Investors can access private equity and private credit at high minimums by investing in a private market fund (think Blackstone or KKR, for instance). On Yieldstreet, they can have access to third-party funds at a fraction of the previously required minimums. Yieldstreet also offers venture capital (fractionalized) exposure directly. Buying a piece of blue-chip art can be expensive, and prohibitive for most investors, which is why Yieldstreet offers fractionalized assets to diversified art portfolios.”
Yieldstreet also provides access to digital asset investments, with the benefit of allocating to established professional funds, such as Pantera or Osprey Fund. The platform does not currently offer commodities but plans to do so in the future.
Access to wide array of alternative asset classes
Access to ultra-wealthy investments
Can invest for income or growth
Learn More Now
Alternative investments largely require thinking out-of-the-box. Some of the best investment opportunities are also the most unusual.
“The price of meat continues to rise, while agriculture remains a recession-proof investment as consumer demand for food is largely inelastic,” reports Chris Rawley, CEO of Harvest Returns, a platform for investing in private agriculture companies. “Consequently, investors are seeing solid returns from high-yield, grass-fed cattle notes.”
16. Interest Bearing Crypto Accounts
Though the primary appeal of investing in cryptocurrency has been the meteoric rises in price, now that the trend seems to be in reverse, the better play may be in interest-bearing crypto accounts. A select group of crypto exchanges pays high interest on your crypto balance.
One example is Gemini. Not only do they provide an opportunity to buy, sell, and store more than 100 cryptocurrencies—plus non-fungible tokens (NFTs)—but they are currently paying 8.05% APY on your crypto balance through Gemini Earn.
In another variation of being able to earn money on crypto, Crypto.com pays rewards of up to 14.5% on crypto held on the platform. That’s the maximum rate, as rewards vary by crypto. For example, rewards on Bitcoin and Ethereum are paid at 6%, while stablecoins can earn 8.5%.
It’s important to be aware that when investing in cryptocurrency, you will not enjoy the benefit of FDIC insurance. That means you can lose money on your investment. But that’s why crypto exchanges pay such high rates of return, whether it’s in the form of interest or rewards.
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17. Crypto Staking
Another way to play cryptocurrency is a process known as crypto staking. This is where the crypto exchange pays you a certain percentage as compensation or rewards for monitoring a specific cryptocurrency. This is not like crypto mining, which brings crypto into existence. Instead, you’ll participate in writing that particular blockchain and monitoring its security.
“Crypto staking is a concept wherein you can buy and lock a cryptocurrency in a protocol, and you will earn rewards for the amount and time you have locked the cryptocurrency,” reports Oak View Law Group’s Lyle Solomon.
“The big downside to staking crypto is the value of cryptocurrencies, in general, is extremely volatile, and the value of your staked crypto may reduce drastically,” Solomon continues, “However, you can stake stable currencies like USDC, which have their value pegged to the U.S. dollar, and would imply you earn staked rewards without a massive decrease in the value of your investment.”
Much like earning interest and rewards on crypto, staking takes place on crypto exchanges. Two exchanges that feature staking include Coinbase and Kraken. These are two of the largest crypto exchanges in the industry, and they provide a wide range of crypto opportunities, in addition to staking.
Invest in Startup Businesses and Companies
Have you ever heard the term “angel investor”? That’s a private investor, usually, a high net worth individual, who provides capital to small businesses, often startups. That capital is in the form of equity. The angel investor invests money in a small business, becomes a part owner of the company, and is entitled to a share of the company’s earnings.
In most cases, the angel investor acts as a silent partner. That means he or she receives dividend distributions on the equity invested but doesn’t actually get involved in the management of the company.
It’s a potentially lucrative investment opportunity because small businesses have a way of becoming big businesses. As they grow, both your equity and your income from the business also grow. And if the business ever goes public, you could be looking at a life-changing windfall!
Easy Ways to Invest in Startup Businesses
Mainvest is a simple, easy way to invest in small businesses. It’s an online investment platform where you can get access to returns as high as 25%, with an investment of just $100. Mainvest offers vetted businesses (the acceptance rate is just 5% of business that apply) for you to invest in.
It collects revenue, which will be paid to you quarterly. And because the minimum required investment is so small, you can invest in several small businesses at the same time. One of the big advantages with Mainvest is that you are not required to be an accredited investor.
Still another opportunity is through Fundrise Innovation Fund. I’ve already covered how Fundrise is an excellent real estate crowdfunding platform. But through their recently launched Innovaton Fund, you’ll have opportunity to invest in high-growth private technology companies. As a fund, you’ll invest in a portfolio of late-stage tech companies, as well as some public equities.
The purpose of the fund is to provide high growth, and the fund is currently offering shares with a net asset value of $10. These are long-term investments, so you should expect to remain invested for at least five years. But you may receive dividends in the meantime.
Like Mainvest, the Fundrise Innovation Fund does not require you to be an accredited investor.
Low minimum investment – $10
Diversified real estate portfolio
Portfolio Transparency
Final Thoughts on High Yield Investing
Notice that I’ve included a mix of investments based on a combination of risk and return. The greater the risk associated with the investment, the higher the stated or expected return will be.
It’s important when choosing any of these investments that you thoroughly assess the risk involved with each, and not focus primarily on return. These are not 100% safe investments, like short-term CDs, short-term Treasury securities, savings accounts, or bank money market accounts.
Because there is risk associated with each, most are not suitable as short-term investments. They make most sense for long-term investment accounts, particularly retirement accounts.
For example, growth stocks—and most stocks, for that matter—should generally be in a retirement account. While there will be years when you will suffer losses in your position, you’ll have enough years to offset those losses between now and retirement.
Also, if you don’t understand any of the above investments, it will be best to avoid making them. And for more complicated investments, like annuities, you should consult with a professional to evaluate the suitability and all the provisions it contains.
FAQ’s on High Yield Investment Options
What investment has the highest yield?
The investment with the highest yield will vary depending on a number of factors, including current market conditions and the amount of risk an investor is willing to take on. Generally speaking, investments with the potential for high yields also come with a higher level of risk, so it’s important for investors to carefully consider their options and choose investments that align with their financial goals and risk tolerance.
Some examples of high-yield investments include:
1. Stocks: Some stocks may offer high dividend yields, which is the annual dividend payment a company makes to its shareholders, expressed as a percentage of the stock’s current market price.
2. Real estate: Investing in real estate, either directly by purchasing property or indirectly through a real estate investment trust (REIT), can potentially generate high returns in the form of rental income and appreciation of the property value.
3. High-yield bonds: High-yield bonds, also known as junk bonds, are bonds that are issued by companies with lower credit ratings and thus offer higher yields to compensate for the added risk.
4. Private lending: Investing in private loans, such as through peer-to-peer lending platforms, can potentially offer high yields, but it also carries a higher level of risk.
5. Commodities: Investing in commodities, such as precious metals or oil, can potentially generate high returns if the prices of those commodities rise. However, the prices of commodities can also be volatile and subject to market fluctuations.
It’s important to note that these are just examples and not recommendations. As with any investment, it’s crucial to carefully research and consider all the potential risks and rewards before making a decision.
Where can I invest my money to get high returns?
There are a number of places you can invest your money to get high returns. One option is to invest in stocks, which typically offer higher returns than other investment options. Another option is to invest in bonds, which are considered a relatively safe investment option.
You could also invest in real estate, which has the potential to provide high returns if done correctly. Finally, you could also invest in commodities, such as gold or silver, which can be a risky investment but can also offer high returns.
What investments can I make a 10% return?
It’s difficult to predict exactly what investments will generate a 10% return, as investment returns can vary depending on a number of factors, including market conditions and the performance of the specific investment. Some investments, such as stocks and real estate, have the potential to generate returns in excess of 10%, but they also come with a higher level of risk. It’s important to remember that past performance is not necessarily indicative of future results, and that all investments carry some degree of risk
In early March, Brown Harris Stevens broker Mindy Diane Feldman had reservations about a First Republic Bank loan.
A buyer had offered to purchase a New York City co-op from Feldman’s client and had pre-approval from First Republic for a below-market-rate mortgage — the bank’s specialty. Feldman wanted to ensure that if interest rates rose, it wouldn’t affect the closing or the buyer’s ability to meet the co-op board’s financial requirements.
“If they were the lowest rates that the bank was offering, then we had volatility risk,” she said.
Two days after the broker asked for details about the mortgage, Silicon Valley Bank collapsed. Fearing that First Republic could get caught in the maelstrom, Feldman urged her client to take another bidder’s all-cash offer.
First Republic’s rock-bottom rates did more than make agents nervous — they led to the bank’s downfall.
Its seizure Monday by the Federal Deposit Insurance Corporation and sale to JPMorgan Chase ended weeks of turmoil for the bank, which saw its stock plummet 89 percent in March as customers pulled out over $100 billion in deposits.
But the drama now shifts to First Republic’s residential and multifamily borrowers — its largest lending pools — and to lending in those markets.
Game over
Early Monday morning, the FDIC took control of First Republic and sold the “substantial majority” of its loans and assets to JPMorgan Chase, the country’s largest bank with more than $3.7 trillion in assets.
JPMorgan acquired $203 billion in loans and other securities, but passed on assuming First Republic’s corporate debt or preferred stock.
Some insiders believe the sale includes $103 billion in residential mortgages, about $23 billion in multifamily loans and nearly $11 billion in other commercial real estate debt.
That contrasts with New York Community Bank’s purchase of Signature Bank’s assets in March, which excluded Signature’s commercial real estate loan book — inviting speculation that the debt was toxic.
Experts say the First Republic sale gives little insight into the health of its assets. But the FDIC committed to covering 80 percent of losses incurred on that debt over the next five to seven years, implying a degree of distress and a “downside risk of significant losses in the portfolio,” said Sam Chandan, director of NYU’s Institute of Global Real Estate Finance.
The FDIC pegged its own loss on the deal at about $13 billion.
First Republic reported $549 million in loans with “high volatility commercial real estate exposure” in the first quarter, more than twice the $252 million it reported a year earlier, according to the FDIC. The first-quarter figure represents a fraction of its $139 billion real estate loan book.
But the bank did not report any non-performing commercial or multifamily loans on its books as of March 31.
Rather, the problem was rising interest rates, which meant First Republic had to pay more on its customers’ deposits while the vast majority of its long-term residential mortgages were issued in a low-rate environment.
For now, brokers don’t expect First Republic’s residential borrowers to experience much disruption. JPMorgan plans to keep all of its branches open, allowing existing loan customers to “bank as usual,” it said Monday in an investor presentation.
Brad Lagomarsino, a Colliers multifamily broker in San Francisco, said he touched base with his personal banker at First Republic on Monday morning, hours after the sale, and said nothing had changed.
“Every loan I have is with them,” Lagomarsino said.
Still, residential brokers including Feldman say they have spent the past month advising clients considering a First Republic loan to line up alternatives.
“Just so there’s a plan A, a plan B and maybe even a plan C,” Feldman said.
David Cohen, a broker at City Real Estate in San Francisco, said some clients have opted to “double-dip” with pre-approval letters, one with a low rate from First Republic and a second from another lender to avoid delaying a closing if First Republic fell.
“We joked that a pre-approval letter from First Republic was the Rolls Royce of pre-approval letters,” Cohen said.
“A gaping hole”
Though it was known for catering to the rich and famous — providing mortgages to Ben Affleck, Mark Zuckerberg and, as recently as last month, actress and socialite Julia Fox — First Republic was also a prominent lender to landlords.
The bank was San Francisco’s top multifamily lender in the first quarter, financing eight out of the quarter’s 20 deals, according to Colliers.
If rival banks were offering a senior loan with an interest rate of 5.5 percent, First Republic was offering one in the lower 5 percent range, Lagomarsino said. Account holders especially often scored preferential terms.
“If you had a ton of money there, you were able to get very good debt,” he said.
No longer.
“They are going to leave a gaping hole in this market in the short-term,” Lagomarsino added, noting that multifamily buyers are already stepping away from regional banks. “You’re seeing people gravitate towards the Chases of the world.”
First Republic was generally conservative in its underwriting, offering lower loan-to-value ratios — generally between 50 and 60 percent — but low rates.
As high interest rates eat into banks’ profits, regional lenders figure to offer less competitive loan terms, leaving a void in the market.
“It’ll be interesting to see if JPMorgan wants to fill that gap,” said Mark Weinstein, the founder of Santa Monica-based multifamily firm MJW Investments.
What is certain is that JPMorgan’s purchase of First Republic consolidates the residential and multifamily lending markets, narrowing options for borrowers.
First Republic was New York’s ninth-largest provider of home mortgages in 2021 with nearly $5 billion in loan volume, according to Home Mortgage Disclosure Act data. It was eighth in California and 23rd nationally.
JPMorgan, by comparison, took the top spot in New York, with $21 billion in volume, and ranked fourth in California and nationally.
First Republic’s sale eliminates one national home-loan heavyweight while inflating another, JPMorgan.
That could be bad news for residential borrowers, Feldman said. With less competition, lenders can set higher rates and stricter requirements while offering fewer loan products.
Other banks “don’t have to compete” with First Republic’s low rates anymore, said Michael Nourmand, head of the Los Angeles residential brokerage Nourmand & Associates.
Rivals including Wells Fargo, PNC Bank, City National Bank and Citibank have spent the past two months snapping up First Republic’s market share after the bank began offering less generous mortgage rates.
Some First Republic borrowers are also concerned about JPMorgan’s size.
“[It] is like Bank of America — too big for personalized service,” Artem Tepler, who runs multifamily developer Schon Tepler Partners in L.A. and held personal loans with First Republic, wrote in a text.
First Republic often sweetened deals by offering potential borrowers interest-only loans. It’s unclear whether JPMorgan will continue that, but insiders say it’s unlikely.
“I don’t think JPMorgan is going to continue the kind of business that First Republic was doing that they weren’t doing themselves,” said Morris Pearl, a former managing director at BlackRock who now chairs the lobbying group Patriotic Millionaires.
JPMorgan plans to spend $2 billion restructuring the bank, according to its investor presentation. It plans to convert certain branches into new wealth centers and said the loans will be placed into its banking divisions.
Beyond that, details are vague. Restructurings typically involve layoffs, selling loans, closing offices and refinancing debt.
Run risk
JPMorgan CEO Jamie Dimon touted the First Republic acquisition as a salve for lingering fears of a banking crisis.
The executive told CNN Monday that the deal “helps stabilize the system” and the threat of bank failures is “getting near the end.”
“Down the road — rates are going way up, real estate recession, that’s a whole different issue,” he said on a call with analysts Monday. “But for now we should just take a deep breath.”
Investors are not convinced. The KBW Regional Banking Index slid 2 percent on Monday, then 6 percent Tuesday morning to hit $81.59 per share, the lowest in more than two years.
Trading of Pacific Western Bank, a regional L.A.-based lender, was halted for volatility multiple times Tuesday after the stock plummeted more than 39 percent, CNBC reported. Valley Bank has dropped 25 percent since the markets closed on Friday.
Chandan, speaking as regional bank shares tumbled Monday, said First Republic’s seizure could reignite fears about withdrawals at smaller institutions.
As the FDIC can only insure up to $250,000 in a customer’s deposits at any one bank, Chandan said a risk remains that smaller lenders could see clients rush to the perceived safety of larger banks. First Republic suffered nearly $102 billion in outflows in the first quarter as clients, anxious about market turmoil, yanked funds.
“This leaves the door open for further runs on deposits from institutions that are perceived to be a significant risk,” the professor said.
David Hunt, CEO of global asset manager PGIM, alluded to that in remarks at the Milken Institute Global Conference in L.A. on Monday.
“There’s a tendency to breathe a sigh of relief on mornings like this,” he said. “Actually, we are just getting started.”
More staggering figures from the Federal Housing Finance Agency, which oversees government mortgage financiers Fannie Mae and Freddie Mac.
The pair, which went into conservatorship back in September 2008, could cost American taxpayers up to $363 billion. Yes, billion.
Less severe scenarios put the numbers somewhere between $221 billion and $238 billion, but if dividend payments on Treasury preferred stock were excluded, the cost would fall to between $142 billion and $259 billion, at worst.
“These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac,” said FHFA Acting Director Edward J. DeMarco, in a statement.
“These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the Enterprises.”
To date, the pair have drawn $148 billion from the U.S. Treasury – these new figures are the projected cumulative Treasury draw through December 31, 2013.
Back when Fannie and Freddie were public companies, they were slammed for taking on unnecessary risk to stay competitive, a strategy that eventually led to their demise.
They dealt in stated income loans, no-doc loans, and other Alt-A loan programs that led to billions in losses.
And Countrywide was reportedly Fannie’s biggest customer, with the mortgage lender accounting for nearly 20 percent of all loans purchased by the mortgage financier in 2008.
Both companies were delisted from the NYSE back in July and began trading on the OTC bulletin board.
Shares of Fannie Mae were up 2.36% to 39 cents, while Freddie Mac was up 1.78% to 40 cents in afternoon trading on Wall Street.
The pair purchase mortgages from banks and lenders on the secondary market, and hold some in their own portfolios while securitizing others.
The value of a stock is made up of several factors, including the companyâs ability to continue making a profit, its customer base, its financial structure, the economy, political and cultural trends, and how the company fits within the industry. Understanding those basic factors will go a long way toward helping you select stocks for […]
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You may have heard mention of preferred shareholders or preferred stocks in investment circles. And you may have wondered: How do I get preferred stocks? Preferred stocks are available to individual investors. That being said, there is a type of preferred stocks that may be out of reach to most, and thatâs participating preferred stocks. […]
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