Finding a decent income stream in early 2010 was a difficult task for investors. After all, global stocks were still reeling from the aftershocks of what was arguably the worst global economic downturn and credit crisis since the 1930s.
To fight the crisis, global central banks slashed short-term interest rates to near zero in most developed markets and pushed down longer-term interest rates by purchasing government bonds and mortgage backed securities in a process known as "quantitative easing."
And that was only the beginning.
Governments around the world took extraordinary measures to stave off a global credit freeze. They recapitalized banks with public funds, guaranteed deposits at financial institutions, and even nationalized companies on the brink of collapse.
The world's savers were one unintended casualty of central banks' largesse. While rescuing banks and driving down rates may have helped resuscitate the credit markets and bailed out borrowers, it also pushed down yields on most traditional low-risk savings vehicles, including U.S. Treasury bonds, high-grade corporate debt, bank savings accounts and certificates of deposit.
Rather than settle for the paltry yields these other investments offer, investors have been increasingly looking to income stocks instead. But this presents pitfalls of its own.
Consider the case of Paramount Energy Trust. This small Canadian energy producer sported a yield of close to 14% back in 2009. A yield that high would have been tempting to many investors. But we steered clear of recommending it to High-Yield International readers. Here's why...
The company's acreage in Alberta looked like a low-risk asset. After all, producers have been extracting natural gas from this part of Canada for years, and the geology and characteristics of the fields are well-known.