To earn more from your savings or investments, think in terms of high yield rather than high interest. The yield from the best-paying investments may be in the form of interest, dividends or distributions. Many of the high-yield investment options trade on the stock exchanges, so you will need a brokerage account to participate. High yield goes hand in hand with higher risk; if you go for these higher payouts, the ultimate value of your principal or initial investment amount is not guaranteed.
To venture into the world of exchange-traded high-yield securities, you will open and fund a stock brokerage account. These high-yield investments are not stocks, but they come in shares and you buy and sell the shares as if they were stocks. The dividends or distributions paid will be deposited into your brokerage account, building a cash balance that you can draw from or use to invest. Before buying any high-yield investment, look at the historical share price to get an idea of how much your investment value could move down or up over time.
Master Limited Partnerships
A master limited partnership is a type of business organization in which the shares are limited partner units instead of common stock shares. The tax rules require an MLP company to pay out all of its net earnings to investors as distributions. Most MLP companies are in the energy sector and own oil wells, pipelines or refineries. The distribution yields from MLPs are among the highest you will find, and many MLPs have paid steady and growing distributions over many years. Distributions from an MLP are treated as partnership income on your tax return.
Closed-end funds are similar to mutual funds except the shares trade on the stock exchanges. A large portion of the approximately 700 closed-end funds pay attractive dividend yields to investors. You can find closed-end funds that own high-yield bonds, foreign bonds, tax-free bonds or alternative debt securities. A closed-end fund earns interest on its bond holdings, and the dividends you earn will be taxed as interest income. These funds leverage their portfolios, resulting in significantly higher dividend yields than those paid by mutual funds in the same sectors. Most closed-end funds pay monthly dividends.
A royalty trust holds income-producing assets such as oil and gas wells. As the wells pump oil or gas, the trust gets a portion of the money from selling the oil and gas, and those royalties are paid out to shareholders of the trust. Both Canadian and domestic royalty trusts trade on the U.S. exchanges. Canadian trusts are allowed to buy and add more assets, while the typical U.S. energy trust holds a fixed portfolio of wells and the output will decline over time. The distributions from a royalty trust will fluctuate up and down with the changing prices of crude oil and natural gas. Dividends from a royalty trust can be tax-free return of capital -- taking advantage of depreciation and deductions -- or taxable income.
Business Development Companies
A business development company, or BDC, makes loans to small to midsize corporations. The clients of a BDC are too small to borrow money by issuing bonds and may be too risky to qualify for bank loans. The tax rules require a BDC to pay out at least 90 percent of its earnings to shareholders as dividends. In February 2013, the yields from the two dozen BDC stocks ranged from 6 percent to more than 10 percent. Many of the BDCs also pay monthly distributions. The distributions from a BDC are a pass-through of the interest the company earns from the investment it makes in client companies.
True Interest Investment
The income from many high-yield investments may be interest, dividends, business income or a combination of these income types. True interest-paying investments limit you to deferred annuities, bank certificates of deposit and individual bonds. These are safety-of-principal type investments, and the interest yields will be lower than other high-yield investment choices. An investment broker can show you different types of bonds with different interest yields based on the creditworthiness or safety of the bond issuer.