With interest rates low worldwide, here are seven strategies to amplify the yield on your investments — with the risks and rewards of each.

The global financial crisis has forced interest rates close to zero on conservative investments like Treasury bonds as governments worldwide have moved aggressively to make credit more widely available.

But investors have other options in their hunt for a cushion against the bumps in the stock market.

Fixed-income investments other than Treasury bonds “today offer the best relative value in the market,” said Ford O’Neil, manager of Fidelity’s Total Bond Fund (FTBFX) with $9.7 billion in assets. “They’re the cheapest they’ve been in the past 25 years.”

The alternatives, all available through mutual funds, offer yields of up to 15% or so — compared to about 3.5% for a 10-year Treasury note. The opportunities are many, and the options vary depending on your risk tolerance. Some are definitely not for the faint-hearted.

“It’s important for investors to know the risks of the investments they’re making,” said Gibson Smith, co-chief investment officer at Denver mutual fund company Janus Capital Group.

Some of the investments that fall on the safer side include municipal and investment-grade corporate bond funds, as well as balanced funds that hold stocks and bonds. Moving up the risk ladder: Funds holding preferred stock; real estate investment trusts; and junk bonds and junk bond funds.

Income-producing securities may be more conservative investments than stocks, but they aren’t a sure bet. Accelerating inflation can erode the value of bond yields. Moreover, if the economy weakens further, there could be a jump in the number of companies defaulting on bond payments.

Experts advise a diverse investment mix. “It’s important for investors to figure out a yield mixture that represents a balance of different securities between ultra-risky and ultra-safe,” said Wes Moss, chief investment strategist at Capital Investment Advisors, a fee-only advisory firm in Atlanta.

“You want to think about the risk-reward trade-offs,” said Fidelity’s O’Neil.

Here are seven strategies for capturing higher yield, with an assessment of the potential risks and rewards for each category.

Municipal bond funds: These funds offer modest yields but also low risk and no taxes — making after-tax returns much more appealing for many investors. There is some risk that the cities, states and municipalities issuing the bonds to pay for roads, schools and other projects will default on their payments, but that risk is generally quite low. On the other hand, some states, notably California, are in serious financial straits. This means investors should tread extra carefully in this arena.

On the plus side, the income investors get typically is tax free, although not all municipal bonds are exempt from federal and state taxes.

“The yields aren’t fantastic. But they’re certainly better than Treasurys,” said Moss of Capital Investment Advisors, noting it’s relatively easy to find a municipal bond fund yielding 4% or more — a yield that’s north of 5% when you factor in the bonds’ tax-free status. On a tax-equivalent basis, that’s roughly 1.5 percentage points above the yield on a 10-year Treasury note. Yields for typical municipal bond funds range from 2.25% for short-term, high-quality funds to more than 6% for funds that invest in riskier securities.

Investment-grade corporate bond funds: These provide a relatively high yield with limited risk that the issuer will default. But if the economy sinks further or a big financial company goes bust, credit could evaporate and corporate bond defaults could indeed jump.

“We think it’s a good time for pretty high-quality corporate bonds,” said Todd Burchett, manager of ICON Bond Fund at ICON Advisers, a mutual fund company in Greenwood Village, Colo.  Yields on investment-grade corporate bond funds range from about 5% to 8%.

Balanced funds: These funds, which typically invest in a mix of stocks and bonds, offer some of the potential return of stocks with some of the stability of bonds. One risk is that companies can cut dividends — more than 60 have this year, according to Standard & Poor’s. Also, Uncle Sam can boost taxes on stock dividends. Those are risks because these funds often invest in stocks with what look like solid dividend yields. In addition, there also are the normal risks of investing in stocks and bonds.

“I would suggest people look at a mixture of large-cap, U.S.-based dividend-paying stocks — especially those that sell into international markets — and high-quality corporate bonds,” said James Swanson, chief investment strategist at MFS Investment Management in Boston. Simple balanced stock-bond funds offer yields ranging from about 2% to 5%.

Convertible bond funds: Considered “cheap” by some investors, these funds offer the relative safety of corporate bonds plus the upside potential of stocks. Convertible bonds allow holders to convert their bonds into stock, and if they do, prices can fall.

“If the company does really well, you have the option of converting some of those bonds into common stock,” said Swanson, adding convertibles “right now are cheap,” with convertible bond funds yielding anywhere from 4% to 10%.

Preferred stock funds: These funds can throw off generous yields but also can get stung if the companies held in the fund go bust. Preferred stock has characteristics of both a stock and a bond: It pays a set dividend, and that payment takes priority over dividends to holders of common stock.

A note of caution: Expect volatility, and hope issuers don’t go belly-up. “You’re second in line behind the bondholders and secured lenders in the event of a default,” said Burchett of ICON Advisers. Yields on preferred stock funds range from about 7% to 12%.

Real estate investment trusts: Also considered inexpensive by some investors, these can offer a relatively high rate of return. But REITs also can be volatile since they are essentially real estate companies selling stock in themselves. REITs typically manage income-producing properties such as office buildings. Investors get shares and a quarterly payment representing a REIT’s income. You can invest directly or through a REIT mutual fund.

“People should at least begin to look at these as they tend to recover later in an economic cycle,” said Swanson at MFS.

Just how volatile can REITs be? One key index tracking this investment class — the MSCI U.S. REIT index — is off about 16 % so far this year.

Junk bond funds: Junk bonds offer high yield, along with a high risk the company issuing the bond will go broke. Junk bonds aren’t investment grade and are subject to big price swings. “They tend to act more like equities than bonds,” said Clint Edgington, president of Beacon Hill Investment Advisory, a fee-only investment advisory firm in Columbus, Ohio. One good option is a high-yield bond fund: A pro picks the bonds, and the holdings are diverse.

Experts advise investors to stay away from buying individual junk bonds. “I would argue that would be very risky,” said Fidelity’s O’Neil. He and others said that a junk bond mutual fund is a better option. Such funds currently offer yields ranging from roughly 8% to 13%.

So take your pick. But remember that while these alternatives can boost the yield on your investments, they don’t offer the safety of government Treasury bonds or other Treasury securities.

How much of your portfolio should be in these types of assets? That depends on your age, risk tolerance, overall mix and other factors. Your financial adviser or Fidelity’s asset allocation tool can help.

BY ROGER FILLION, FIDELITY INTERACTIVE CONTENT SERVICES

There was a time when dividend-paying stocks were considered low-risk investments. If you were a cautious, conservative investor, you bought shares in a bank, or an insurance company, or a utility, then you went to sleep. While you snoozed, dividend cheques dropped through your mail slot every three months and your shares gradually increased in value.

Dividend investing worked so well because banks, insurance companies and utilities made it a priority to maintain the stream of dividends that they paid to you. These companies knew that you bought them for the steady flow of cash they delivered. Management knew it had no room for playing with your expectations.

Both companies and investors prospered under this arrangement — until financial wizards south of the border became too smart by half. They engineered the greatest housing boom of all time, built on a foundation of shaky debt. The result is the recession we see around us.

The recession has smacked dividend stocks, especially stocks in the financial sector. No longer are these stocks praised as relatively safe havens; now they’re scorned as risky gambles. Why? Because investors worry that banks and insurance companies will no longer be able to continue paying their current dividends.

The easiest way to measure the level of investors’ fear is to look at what has happened to dividend yields — the annual amount of a stock’s dividends divided by its stock price. The average dividend yield on Canadian financial stocks now stands at a whopping 6.5%. That is almost double the historical average. It is, by any standard, an extremely attractive yield.

So does that mean that these stocks are a good investment? Assuming that the world will eventually return to normal, dividend yields will one day revert back to their historical mean. For that to happen, one of two scenarios has to occur — either banks will have to cut their dividends, or stock prices will have to rise to the point that dividend yields fall back to the normal level of 3% or so.

In my view, the latter scenario has a much higher probability of prevailing than the former. So I think these stocks are likely to do very well in the years ahead.

Before you get carried away, let me explain the risks involved. Dividends, as you may know, have to be declared every quarter at the discretion of a corporation’s management. No corporation has a legal obligation to pay dividends. A firm is allowed to cut dividends if times get tough.

If a company pays $3 of dividends per share, and the stock price is $50, the dividend yield to investors is 6%. If the stock price goes up, or if management cuts the dividend, the yield goes down.

In the U.S., dividends have been going down, down, down. The subprime mortgage crisis has hammered large U.S. banks and those banks have slashed their dividends to conserve cash.

In Canada, investors fear that our banks will do the same. This is why the high yields on their shares aren’t attracting buyers the way they once would have.

I can understand the fear. We have yet to see the full impact of the recession on the credit quality of Canadian banks. If people stop paying their mortgages and credit cards, then banks will suffer and they will cut their dividends.

I think, though, that fears of a dividend cut are overblown. Unlike their U.S. counterparts, Canadian banks have not experienced devastating losses from subprime mortgages. Yes, their earnings have declined, but, by my calculations, both their earnings and capital remain sufficient to sustain current dividends. In fact, in March there were reports that Canadian banks have started to refuse the government’s offer to buy illiquid mortgage assets. This refusal strikes me as a clear sign that the banks have no liquidity issues. If they can turn down government’s helping hand, they must be doing all right.

While banks look tempting, there is an equally bullish case for Canadian insurance companies. Their dividend yields are now higher than those of bank stocks, which is a rare occurrence. The yields have soared because investors are worried about a recent falloff in underwriting revenues and the degree to which stock market losses have hurt insurance companies’ portfolios. But while the short-term outlook remains bleak, it’s hard to imagine that recent losses could be large enough to permanently impair those big firms. I believe that in 10 years we will look back at today’s prices as the buying opportunity of a lifetime.

All of this means that financial stocks could be a bargain. As always, though, I urge you to invest with restraint. Rather than putting all your eggs into one or two stocks, consider buying a mutual fund that invests in dividend-paying stocks. Those dividend funds typically invest between 40% and 50% of their portfolio in financial stocks. The rest of the portfolio is usually diversified into sectors such as telecommunications, utilities and pharmaceuticals, or into some lower-risk asset classes, such as income trusts and preferred shares.

I’ve compiled a list of my favorite choices for dividend, which you can see below. In creating the list, I have tried to pick true dividend funds. I have avoided managers who have a tendency to stray away from their mandate in search of a quick buck. This tendency is more common than you may think. During the now defunct bull market, many dividend fund managers invested heavily in commodity stocks while reducing their exposure to high-yield equities. As a result, those funds distributed lower dividends than expected. During the bear market, their losses exceeded those of the typical dividend fund.

*Source: Fundata Canada Inc., February 2009The funds I’ve chosen have stuck to their core mandates. While it’s difficult to estimate their yields going forward, I have tried to estimate the dividend yields of their top holdings (net of expenses) based on the most recent disclosure of each fund. The estimated yields are almost double what they were a year ago.

I think these funds are good investments but keep your expectations in check. Prices won’t rebound to last year’s level anytime soon. The economic crisis may not have hit bottom. Even if it has, investors have been hurt and will take time to regain confidence in stocks.

My advice is to invest in these funds in small increments. Never use money that you may need in the next few years. After all, the longest bear market in history lasted three years and took away 85% of equity values. We are only a year and change into this bear market, with losses of 50% or so. So proceed cautiously.

By Suzane Abboud