High yield investments offer high returns, but greater risks. Knowing how the high yield investment generates its returns and what factors can cause those returns to go down or up are the details you need to understand to gain the rewards.

When you evaluate investments that appear to pay more, question everything and pay attention to the details. You should have a full understanding of the factors that influence the return including financial operating conditions, industry competitors and overall economic conditions.

Whilst high yield investments may generate a significant return on investment, you must be prepared to see your original sum invested (the principal) fluctuate, sometimes drastically.

High yield bonds

High yield bonds are issued by companies whose financial strength is likely to change, fail or collapse. Often referred to as "junk bonds", they must pay a higher yield than other safer alternatives in order to attract investors. You can buy individual high yield bonds or a high yield bond mutual fund for diversified options.

Preferred stocks

Technically an equity investment, they often get compared to bonds as they are highly interest rate sensitive. Preferred stocks pay dividends at a fixed rate and a company is required to pay dividends to their preferred stock holders before a single penny gets paid out to common stock holders.

Dividend paying stocks

Dividends from stocks can provide a source of changeable income. If the company gets in financial trouble, it can reduce or eliminate the dividend all together. You can do your own search for stocks with a history of steady and rising dividends or buy a dividend income fund.

Closed end Funds

A closed end fund is a form of a mutual fund. It contains a pool of investor money, but once the fund has issued a certain number of shares, it closes to new investors. To buy shares you must buy them just like you buy a stock, on an exchange from someone else who is selling their shares. Many closed end funds use leverage (they can borrow against the portfolio to buy additional investments) which can contribute to their high yields.

Retirement income funds

Retirement income funds are professionally managed with the objective of generating consistent monthly or quarterly income. They provide an attractive alternative to managing your own portfolio and can also function as an alternative to an immediate annuity which returns your principal plus interest over time.

Peer to peer investing

A growing trend for alternative asset investors looking for high yield investments is to invest in loans originated by online lending portals. The online portal connects investors and borrowers and provides a platform that sets market rates for the loans. These loans can be pooled together or funded by one person, meaning you can lend small amounts to many people, or a larger amount to one person. Just as with any loan, you take on the risk that the borrower may not repay the loan.

Master limited partnerships

A master limited partnership (MLP) is a publicly traded partnership which, unlike a corporation, passes its income through to you, the investor. This structure allows the company to avoid paying taxes at the corporate level, which is one of the reasons they make attractive high yield investments. The amount of income generated by a MLP will be dependent on the price and volume of the product or service they produce; most often they are in the oil and gas business.

Canadian income trusts

Vehicles that hold direct or indirect holdings in income producing assets strictly for the purpose of paying high, stable and predictable income streams to the unit holders.

Loans backed by deeds of trust

Many commercial real estate projects secure their initial funding from private sources. When you lend money on these types of projects you should be listed on the deed of trust as a lien holder, so if the borrower stops making the payments, you can foreclose. Foreclosure can be a lengthy process and the property may be in a bad way when it is returned. This form of private lending can certainly produce high yields, but also high risk.