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5 High-Yield Fixed-Income Investment Examples

Byline profile imageEdited by Mark Henricks
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Byline profile imageEdited by Arturo Conde, CEPF®
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High-yield fixed-income investments aim to provide steady income, capital preservation and higher returns than traditional fixed-income assets like government bonds or savings accounts. Although these investments carry more risk, they can help diversify your portfolio. You may also consider these investments if you’re seeking higher yields for growth or income needs.

If you have questions about high-yield fixed-income investments and their role in your portfolio, consider working with a financial advisor. 

What Is a High-Yield Fixed-Income Investment?

A high-yield fixed-income investment is a type of bond or debt security that offers higher interest rates compared to more conservative investments. However, there’s more to these investments than the chance to earn a greater return.

The higher yield typically reflects the higher level of risk associated with these investments. Issuers of high-yield fixed-income securities are often companies, municipalities or countries that are perceived to have a lower credit rating. To counter the less appealing credit profile, they must offer higher returns to attract investors.

Unlike highly secure fixed-income investments, such as U.S. Treasury bonds and certificates of deposit, there is a greater risk of default when investing in high-yield bonds and other fixed-income products. This means that there is a better chance the issuer may not be able to meet its obligations to pay interest or repay the principal amount at maturity. If a default does occur, it is possible for an investor to lose their entire investment, along with uncollected principal. 

In addition to bonds, high-yield fixed-income investments can include other financial products, such as dividend-paying stocks, that provide a consistent income stream with higher yields than more traditional options. High-yield options are often more popular with investors when interest rates are low. 

5 Examples of High-Yield Fixed-Income Investments

There are several types of high-yield fixed-income investments to consider, each offering different risk and return profiles. 

  1. High-yield bonds (junk bonds): High-yield bonds, often referred to as junk bonds, are issued by companies or governments with lower credit ratings. These bonds offer higher interest rates to compensate for the greater risk of default. Junk bonds can be attractive to investors willing to take on more risk for potentially higher returns, especially during periods of economic growth when the risk of default may be lower.
  2. Corporate bonds: Corporate bonds are issued by companies to raise capital and can be high-yield if the issuing company has a lower credit rating. While investment-grade corporate bonds offer lower yields and lower risk, non-investment-grade corporate bonds provide higher yields but come with increased risk.
  3. Emerging market bonds: Emerging market bonds are issued by governments or corporations in developing countries. These bonds typically offer higher yields due to the perceived higher risk of economic instability, political uncertainty or currency fluctuations in the issuing country. Despite these risks, emerging market bonds can provide high returns and serve as a way to diversify a fixed-income portfolio.
  4. Preferred stock: Preferred stock represents a hybrid investment, offering features of both stocks and bonds. Investors receive fixed dividends, often higher than common stock dividends, and these dividends are paid out before any distributions to common stockholders. While preferred stock is considered riskier than bonds, it generally offers more stability than common stocks.
  5. Convertible bonds: Convertible bonds can be converted into shares of a company’s stock at a later date, giving them the potential for capital appreciation. These bonds typically provide lower yields than junk bonds, but the opportunity to convert to equity at a favorable price can increase the overall value for investors. Convertible bonds are often seen as a balance between the stability of fixed-income investments and the growth potential of stocks.

How to Analyze Bond Ratings and Yields

Two investors reviewing their portfolio.

It’s a good idea to know how to evaluate bonds before investing in high-yield fixed-income products. Two key areas to assess are bond credit ratings and yield metrics.

Bond Credit Ratings

Credit rating agencies like Moody’s, S&P and Fitch assign ratings to bonds based on the issuer’s creditworthiness. 

  • Investment-grade bonds typically have ratings of BBB-/Baa3 or higher.
  • High-yield, or junk, bonds are rated BB+/Ba1 or lower.
  • AAA is the highest rating, indicating extremely low credit risk, while D typically indicates a defaulted bond.

These ratings provide a quick benchmark to help investors gauge the likelihood of default. However, it is wise to read an issuer’s financials or bond prospectus for a fuller picture.

Yield Metrics

Current yield is calculated by dividing the annual interest payment by the bond’s current price. It gives a snapshot of income relative to price, but it fails to account for the bond’s maturity value.

Yield to maturity (YTM) is a more comprehensive figure that considers the bond’s total return if held to maturity, including all coupon payments and any difference between the purchase price and face value.

A typical bond quote includes several parts, including: 

  • The bond’s price (as a percentage of par)
  • Yield
  • Coupon rate
  • Credit rating
  • Maturity date

The bond prospectus or offering statement provides detailed financial information about the issuer, the structure of the bond, risks and terms. Reading this document can help you assess whether the investment aligns with your risk tolerance and income goals.

How to Invest in High-Yield Fixed-Income Investments

Before investing in high-yield fixed-income investments, consider your risk tolerance, investment goals and financial situation. Also, research the different types of high-yield fixed-income investments available to you. It is important to understand the risk profile of each option and how they fit into your broader portfolio. For each investment type, assess the credit ratings, yield and potential for growth or default.

When you are ready to invest in high-yield fixed-income products, you must first open an account with a brokerage or investment platform that offers access to bonds, preferred stock or other relevant products. Many brokerages provide detailed information on available high-yield investments, allowing you to trade bonds and bond funds directly.

If you are unsure where to start, consult a financial advisor. High-yield fixed-income investments carry specific risks, and a financial advisor can help determine if they align with your goals and income needs.

Bottom Line

An investor researching the benefits and risks of investing in high-yield fixed-income investments.

High-yield fixed-income investments offer higher returns but come with more risk. Options like high-yield bonds, corporate bonds or emerging market bonds can provide increased income and diversify your portfolio. However, with a higher risk of default than traditional investments, it is crucial that you perform your due diligence by thoroughly researching your options before making an investment. With careful planning, these investments can be a useful part of your overall strategy.

Consider asking a financial advisor about whether high-yield fixed-income investments have a place in your portfolio based on your overall financial goals and risk tolerance.

Tips for Investment Planning

  • If you’re thinking about adding high-yield fixed-income investments to your portfolio, a financial advisor can help you align them with your financial goals and risk tolerance. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you have already decided to invest in high-yield savings accounts, here’s a roundup to help you get started.

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