Looking for high-yield low-risk investments should start by considering well-established companies that offer you these qualities

In our view, your goal as an investor, particularly if you follow our Successful Investor approach, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or even losses.

High-yield low-risk investments can be part of this if they involve strong companies. Well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

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Spread out your investments by sector to reduce risk

Your portfolio strategy should begin with a fundamental piece of advice that we underline frequently. Spread your money out across most if not all of the 5 main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Canadian Finance and Utilities sectors involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.

The best high-yield low-risk investments will have hidden assets

Low-risk investments typically equate to safer investments. For safer investing, focus on high-quality stocks that offer hidden value. As you know, we put a lot of stress on what we call “hidden assets”—assets that are easy to overlook, since their full value rarely appears on a company’s financial statements.

These assets include long-time real estate holdings that are worth much more than their balance-sheet value (usually original cost minus depreciation). Under-used brand names are another good example. When they are developed in-house, they won’t show any balance-sheet value. Another key hidden asset—one of our favourites—is research spending. Companies write off their research outlays in the year in which they spend the money, but benefits such as new or better products may take years to materialize.

Take a broad view when looking for high-yield low-risk investments to add to your portfolio

When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective.

But things are never quite so simple, even with lower-risk investments. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put the funds it borrowed to immediate profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.

In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.

Our goal is to put the information in a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap. In the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook. That ensures a place in a portfolio for low risk investments.

Learn to find the best stocks paying solid dividends for future returns

• Look for companies with a history of long-term success.
• Examine the current financial health of the company.
• If a company currently offers a steady dividend, this is a good sign of its potential to continue doing so.
• Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
• Download our free report Dividend Paying Stocks: How High Dividend Stocks Can Supercharge Your Income Investing to build strength into your portfolio by investing in the best high-quality dividend stocks.
• Subscribe to TSI Network’s Dividend Advisor. When a dividend-paying stock grabs our attention, we write about it here.

Watch out for this big risk when you consider high-yield low-risk investments

When looking for stocks with high dividend yields, avoid the temptation of seeking out stocks with the highest yield—simply because they have above-average yields.

That’s because a very high yield may signal danger rather than a bargain if it reflects widespread investor skepticism (through its low share price) that a company can keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Use our three-part Successful Investor approach for portfolio success

1. Invest mainly in well-established, high-quality, dividend-paying stocks;
2. Spread your money out across most, if not all, of the five economic sectors;
3. Resist the lure of buying stocks when they are in the broker/media limelight. Market setbacks are unpredictable. When they hit, stocks that are or have recently been in the limelight can post particularly deep and staggering losses.

High-yield low-risk investments are difficult to find. How have you been able to place them in your portfolio?

What steps do you take to find high-yield, low-risk investments?