In the world of stocks and bonds, higher
yield may mean higher risk.
Low-rated bonds, which expose you to greater
risk of default, must offer higher interest than better-rated
bonds in order to sell their issues. Those higher rates translate
into higher yields per dollar of investment. But because the issuing
company may be on shaky ground, you run the risk of losing interest
payments and your principal.
Similarly, some companies that have traditionally
paid stock dividends may continue to do so even as their stock
price slips. That changing ratio increases the yield, which may
be a sign that the company is in trouble.
On the other hand, some companies whose stock
prices tend to change very little over time have traditionally
paid higher dividends than others to increase investors'
total return. In this case, high yield is usually not a danger
sign.
Experts suggest it's important to look
at yield in the context of other information about a company before
you make any investment decisions.
