How to Identify High Yield Bonds

Every investor is looking for the next high yield security. These investments can give high returns on an initial investment, but also are more risky than stable, low yield funds. When someone talks about a high yield bond, they mean one that has an above average interest rate. It takes special skills and a bit of luck to identify a high yield bond.

Difficulty:

Moderately Challenging

Instructions

1. Learn to read bond credit rankings. One of the most common grading styles is Standard and Poor's Rating Service, which ranks credit from poor quality (Caa) to high (Aaa). Most of normal yield bonds probably fall in the middle (B or Ba) and bonds that are in default and not paying interest are given the lowest rating (C).

2. Check the prospectus or the website of the bond's issuer to see its current and past credit rankings. A lower credit ranking could mean you've found either a high yield bond or a failing company. See if the credit ranking has been moving up or down in the past 2 years.

3. Research the industry and company of the bond that you think may be high yield. A growing credit score isn't enough to identify a high yield bond. You want to find out if the industry is growing or is anticipating any new technologies that could expand business.

4. Diversify your portfolio by adding some high yield bonds. Since these bonds carry more risk, you don't want them to make up more than 5 to 10 percent of your total portfolio. Luckily, many high yield bonds are in specialized industries that are unrelated to market factors and often experience growth in a slowing market.

5. Consider looking into global stock markets to identify more high yield bonds. The global market also exposes your investments to changes in currency values. You could, for example, capitalize on a growing high yield bond in a foreign stock market and then have your profits increased dramatically by an exchange rate that works in your favor.

Tips & Warnings

• You can minimize the risk of high yield bonds by limiting your holdings of each company to only 2 percent of your total investments.

• When researching a potential high yield bond, you also want to search various media websites to find out about how the company is run and past business ventures of its board members.

• It may be very difficult to identify a foreign high yield bond if you don't speak the language of that country. Remember that you'll still have to do research on the company and possibly learn a new credit ranking system.