In 1981 the nominal yield on a 10yr US Treasury Bond was more than 15%. Since that time the yield on 10yr US Treasuries has steadily declined to what is now 1.5%. For investors looking for income, 1.5% is not very attractive. To make matters worse, roughly 35% of global investment grade government bonds are now yielding less than zero, which means investors pay the governments for the privilege of holding the bonds. This trend is not likely to end soon as global central banks continue to try and support their economies.
Setting aside the issue of this negative interest rate experiment, traditional bond investors are left looking for some source of yield. During the beginning of the year there was a rush to high yield bonds, which have higher yields, but come with more risk. Those flows have subsided and more recently high quality dividend paying stocks have seen significant inflows. Those stocks have attractive dividend yields, but more price risk than even high yield bonds. MLPs, REITs, and Emerging Market Debt have also been receiving attention for their attractive yields. The trend is that investors are taking on more and more risk for the same 3-4% yield that they used to be receiving from high quality investment grade bonds.
Blindly chasing yield can leave a portfolio much more susceptible to market events. I would compare it to getting off a cruise ship and onto a speed boat. It can be a lot more fun on the speed boat, but when the weather kicks up you are really going to wish you were still on that cruise ship. Don’t abandon your core fixed income allocation for a little more yield. Avoid chasing the trends because chances are that you will be late to the party. A diversified portfolio with allocations to all of the asset classes mentioned above and potentially some illiquid investments that are insulated from investor sentiment should be able to provide adequate yield without adding significantly more risk to your portfolio.