A few years ago, a small Canadian energy producer called Paramount Energy Trust sported a yield of close to 14%.
That sort of yield would have been tempting to many investors.
Formed in 2003, the trust had a long history of paying monthly distributions. And while distributions were cut during the 2007-2009 financial crisis, it was not unusual -- many energy producers cut their payouts as oil and gas prices plummeted in the recession.
But Paramount faced one huge problem: natural gas prices. The trust's heavy focus on producing natural gas from fields in Alberta was a tailwind as gas prices climbed steadily from 2003 to 2008. But unlike oil prices, gas prices in North America never regained their footing after the 2008 financial crisis.
The culprit: a jump in low-cost gas production from North America's vast shale plays such as the Marcellus Shale in Pennsylvania and the Haynesville Shale in Louisiana. A rush of gas from these fields pushed prices so low that production from Canada's shallow gas fields was no longer competitive.
Years later, Paramount, now renamed Perpetual Energy (TSX: PMT.TO), is trading below CA$1 per share and hasn't paid a distribution since October 2011.
I bring this up not to pick on Perpetual Energy... or natural gas as an investment. In fact, at these levels, the future of natural gas could be bright.
Instead, I'm using Perpetual Energy as one example of the perils of blindly chasing high-yield investments. While there are some quality companies yielding north of 10% in the current low-interest rate environment, the double-digit yield universe is replete with income traps -- companies facing fundamental headwinds that may soon force them to slash their payouts to investors.
By no means does a high yield automatically mean trouble. But I have found that often it's not the highest-yielders that provide the best total returns, but the companies paying increasing dividends.