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Low-risk, high-return investments have become scarce in the low-interest environment that followed the 2008 financial crisis.
Historically, income investors could get respectable yields from an array of relatively safe investments, such as bonds, certificates of deposit (CDs), and, at one time, savings accounts.
But nearly seven years of zero-interest rate policies by the U.S. Federal Reserve have dragged down returns on all interest-dependent investments to the point where they're almost not worth the bother.
The 10-year U.S. Treasury Bond yield is just 2.42%. Bank savings accounts typically pay fractions of 1%. (Does anyone remember when just about every bank in town paid 5.25% interest on a savings account?)
CD rates are abysmally low. According to Bankrate.com, a one-year CD this week pays a yield of just 0.27%. A five-year CD has a yield of 0.87%.
Tiny yields like that have little appeal to any investor.
And the situation doesn't figure to improve any time soon. While Fed Chairwoman Janet Yellen has hinted at a possible rate hike later this year, any increase will be too small to have much impact. Normalization of interest rates will take years.
But the need for income-producing high-yield investments has not gone away. And it has led some income investors to consider risky alternatives.
Junk bonds top that list. They offer higher rates of return, but carry much more risk than what's known as investment-grade bonds. When interest rates rise, not only will the value of a junk bond drop, but it's more likely to default.
High-yield stocks also can look like a good high-return investment. Not all high-yield stocks are bad, but it's easy to get burned.
A company in trouble will chop its dividend, which usually means a big drop in the stock price – and lost capital. Even if a company is doing okay, a suspiciously high dividend that exceeds earnings is unsustainable. And it means a costly dividend reduction is likely.
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.