Never in American financial history has the Federal Reserve explicitly stated its interest rate policy two years in advance.
It’s not a good sign. It means the economy is stalling out, and that savers will continue getting squeezed.
That being said, low interest rates allow for businesses to deploy capital with very low rent or cost of funds. And that’s exactly what the Fed is hoping for.
As an investor with cash lying around, well, you’re in for a bad ride.
It’s insult enough that your cash has been paying 1% for the past three years. Even worse, it’s going to stay that way for at least another three years, maybe even longer.
In fact, if we enter into a Japanese-style deflationary market, yields could be at this level for a decade or more. (Check out the yields at EverBank – they’re much higher than any conventional bank account by a factor of at least 10 times.)
Squeezing the saver into investing in riskier assets, like stocks, is also part of the Fed’s plan. Such a strategy bodes well for stocks, as they’ll ultimately be the asset class that most jump to.
It makes sense to favor stocks, given how easy they are to buy and the potential for public companies to improve their profits a few quarters down the line.
When companies are making money, they can do three things with it:
- Reinvest it into its business,
- Retain it for future capital plans, or
- Pay it out to the shareholders in the form of dividends.
I can assure you, the last thing a company wants to do is absolutely nothing with its cash. Touting a lot of cash on the balance sheet earns companies virtually nothing today.
So while it’s prudent to save for a rainy day, there’s only so many dollars a profitable, cash-generating company needs to hold.
With that in mind, buying other companies or reinvesting in their own operations are prudent moves… and also healthy for the market over the long term.
However, it’s the third aspect that you should really be interested in – dividends.
Cash sitting on the books at companies like Microsoft or Coca Cola or Intel will make it into your hands as a shareholder sooner or later. And profitable, dividend-paying companies usually grow their dividends, as well.
Better still, there are companies in the market today paying exceptional dividends – 10 times or more what a checking account might be paying you.
I suspect that most investors still haven’t grasped the fact that rates are going nowhere. When they finally do, the fat, juicy yields being paid out right now will likely be gone.
Don’t fall into this trap!
The recent market correction has brought prices down. Further corrections will do more of the same. As such, you need to set up a plan now to invest in the high yielders on any market dips.
Here’s a list of companies that you should consider adding to your portfolio whenever the market tumbles. They’re all solid companies, paying in excess of 4%.
Merck (NYSE: MRK)
Pfizer (NYSE: PFE)
Intel (Nasdaq: INTC)
Progress Energy (NYSE: PGN)
Consolidated Edison (NYSE: ED)
Southern Company (NYSE: SO)
Bristol Myers (NYSE: BMY)
Altria (NYSE: MO)*
Windstream (NYSE: WIN)*
*even higher yields with a little more risk
Ahead of the tape,