Investors starved for income are gravitating to ETFs with high dividend yields. However, they shouldn’t forget that stretching for yield means taking on more risk.
“Since 1982, the average yield on 90-day Treasury bills has been 4.70%,” Russ Koesterich, iShares Chief Investment Strategist, wrote in a research note. “Today, investors would need to accept a substantial amount of both interest rate and credit risk to achieve a yield even approaching 5%.”
The Federal Reserve has pledged to keep interest rates low and much of the developed world is dealing with high debt levels. [Where to Find Yield in ETFs]
“This means that investors may be facing a low-yield environment for many years to come,” Koesterich added. “With demand for capital low and central banks determined to maintain real rates at or below zero, investors are likely to remain yield-starved for the foreseeable future.”
Meanwhile, investors have sought out dividend paying stocks to supplement their yields, and the yields may be rising. Dividend yields have just crossed their 20-year average – the S&P 500 currently yields about 2.1%, a little better than the 20-year average of 1.95%. [Dividend ETFs: Look Before You Leap]