If I see an eye-popping potential return like that, I am always interested. It could seriously boost my portfolio’s performance if realised. So, it’s worth taking a closer look.

Flying high

Amedeo, a specialist fund, was listed on the London Stock Exchange in 2015. It took the cash raised from the equity (and debt) issue, bought two A380 aircraft, and leased them to Emirates. By 2018 and after further equity and debt raises, it had amassed a fleet of 14 jets of which eight were leased to Emirates, two to Etihad, and four to Thai Airways.

Etihad bought its two leased aircraft outright on 24 February 2020. That was fortunate as, within weeks, flights were grounded worldwide due to the coronavirus pandemic. The cash came in handy as the company had to start granting lease payment holidays and restructuring some entirely. Still, it didn’t stop it from cancelling all returns of capital to its shareholders.

High-yield stock warning

The company was confident enough to start paying a quarterly dividend of 1.25p on 31 January 2022. This was increased through 1.5p to 1.75p from April 2023 onwards. Though past performance is not an indicator of future results, that’s not far away from the initially planned dividend of 2.06p, which analysts think the company will hit again in 2024.

Although the Amedeo share price is almost double what it was two years ago, it is a third below its pre-pandemic value and half what it was at listing. Investors do appear to lack faith.

Thai Airways declared bankruptcy during the pandemic and is still in the hands of the administrators. Its lease payments are a big risk. If lost, I think Amedeo would struggle to find a new lessee for those four aircraft. The airline industry is not back on its feet yet and that is particularly true for the long-haul sector. Amedeo’s planes are all long-haul models.

The most recent company statements talk about depressed long-haul aircraft prices. Given that Amedeo is highly leveraged, as it financed the purchase of aircraft with about twice as much debt as equity, in the event of a forced sale of aircraft the shareholders will not be the winners. 

Amedeo Air Four Plus shares

I think investors are right to be cautious about this stock. Its high yield is probably right where it needs to be given the risks. There are also some other curiosities with this stock that I am not too keen on.

The company returns capital to shareholders via compulsory share redemptions. There have been three of these so far, the latest at the beginning of this month. Then the company called back one share for every eight owned for 64.5p. Now that price was well above the market price of about 42p, and in the past that has always been true if perhaps not so pronounced. Still, I am not comfortable with this mechanic and on balance, I am not going to be buying this stock for my Stocks and Shares ISA and will look elsewhere.

The post I like high-yield stocks, so I should love a 17.5% one, right? appeared first on The Motley Fool UK.

However, if you’re prepared to take on additional risk, you may want to consider investing in investment trusts. Buying shares in an investment company is a quick and relatively inexpensive way to help diversify your investments, and there are some very eclectic trusts which generate reliable high yields that are backed up by relatively safe underlying investments.

P2P investing

Peer-to-peer lending has grown rapidly in recent years and is fast becoming a popular source of income for investors hunting for better returns than those offered by savings accounts.

But for investors who don’t want to go through the trouble of setting up their own account with a peer-to-peer lending platform, P2P Global Investments (LSE: P2P) offers an alternative route to gain access to the sector. It’s an investment trust that offers investors a ready-made and diversified portfolio of peer-to-peer loans, saving time from building a portfolio from scratch and enabling investors to earn income straight away. At its current share price, it has a trailing 12-month dividend yield of 6%.

Discount to NAV

P2P Global Investments is particularly worth considering because the fund trades at a big discount to its net asset value (NAV). Although the discount had narrowed substantially since it announced plans to improve its loan book performance in April, the valuation gap has begun to widen again in recent weeks. Shares in the fund now trade at a 24% discount, meaning investors can buy into the loans portfolio for less than the sum of its parts.

Sure, concerns about rising default rates will continue to sway its shares, but I reckon these fears may be overblown. And even if I’m wrong, its sizeable discount offers a cushion against any painful eventualities.

Aircraft leasing

For investors willing to take on a bit more risk, Amedeo Air Four Plus (LSE: AA4) offers potentially greater rewards.

The investment company seeks to obtain income and capital returns for its shareholders by acquiring, leasing and selling aircraft. Its a business model which generates a reliable income stream that is secured against a very movable, hard tangible asset.

With the steady rental income that the aircraft lessor receives, it pays a quarterly dividend of 2.065p per share, giving its shares an attractive current yield of 8%.

Downside risk

One major downside risk is that uncertainties about resale values could be a major concern for investors. All aircraft are leased from the company for a period of 12 years, meaning planes can be returned to the company after that period. Aircraft lessors are usually then able to sell the asset or re-lease it for reasonable value, but that isn’t always the case.

AA4’s eight Airbus A380s are of particular concern, because demand for the aircraft is very limited. Dr Peters Group, a German leasing company, recently placed an A380 into storage after Singapore Airlines decided to retire the plane from service and return it to its lessor.

One consolation is that AA4 has recently been diversifying its portfolio to include other aircraft types, such as the A350 and the Boeing 777. I expect further new aircraft acquisitions will occur in the future, reducing the risk even more.

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