Rock-bottom interest rates have investors scrambling for sources of dividend income. Robert Levine, founder of Nomura Corporate Research and Asset Management, explains one way of doing this in his soon-to-be published book, How to Make Money With Junk Bonds.

Also known as below-investment-grade corporate bonds or high-yield bonds, these debts offer greater returns with higher risks.

Levine served as CEO and chief investment officer for nearly 20 years and managed more than $15 billion at his firm, specializing in researching junk bonds.

IBD: What are the pros and cons of buying junk bonds?

Levine: The biggest pro of buying junk bonds is their high yield. Studies have shown that this yield advantage can make junk bonds very competitive with other asset classes both on an absolute basis and when compared to the volatility of the asset class.

The higher yield is significant in this time of low interest rates. For example, the 10-year Treasury is yielding less than 2% while one high-yield index is yielding 7.2%. That is a 5.2 percentage point difference that can compound over years.

Default is the biggest risk, both for an individual company or for the asset class as a whole. If a firm fails, the price of the bonds can fall significantly. It is not unusual for bond prices to trade at 50% of face value or lower.

The price that a defaulted bond trades at is a function of where the bond sits in the capital structure, the amount of liabilities and the value of the defaulted firm’s business or assets. The long-term default rate is about 4%. Default rates for the asset class can vary greatly. Periods of high default have occurred several times since the 1980s (the beginning of the modern junk bond market) and will occur again.

IBD: What is your opinion of the most widely traded junk bond ETFs, iShares iBoxx $ High Yield Corporate Bond (ARCA:HYG ) and SPDR Barclays Capital High Yield Bond (ARCA:JNK )?

Levine: Both HYG and JNK have come into their own this year. Both have grown dramatically. There are differences between them in size, performance and the index they mimic.

They have both underperformed the high-yield market year to date. They may be overconcentrated in the most liquid bonds, which they are bidding up, and thus making smaller issues not in the ETF relatively attractive. That being said, they should be a good option for the conservative retail investor.