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| Nilus Mattive, Editor, Dividend Superstars |
Tony Sagami is off today. And in light of the recent Fed actions to push interest rates down so far, so fast, he asked me to share my thoughts on income investments.
I’m not going to mince words — today’s situation is lousy. Remember when Ford told New York City to “drop dead” in the 1970s? Well, right now, the Fed’s message to income investors is essentially the same.
It’s bad enough when Washington uses our tax dollars to help bail out reckless lenders and greedy housing speculators.
But now they’re going one step further — pushing interest rates down so low that most nest eggs won’t even be able to keep pace with inflation.
Just in the last two weeks, Ben Bernanke has slashed rates by a full 125 basis points. And he’s not done cutting.
That may be welcome news for some house flippers with adjustable-rate mortgages and credit card borrowers with outrageous balances (provided those rates also come down) … but it’s horrible for anyone with the foresight and discipline to save and invest!
Take a look at what the latest round of rate cuts have done to the major income investment categories:
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Ten-year U.S. Treasury bonds were recently yielding 3.6%, near their lowest level EVER!
Meanwhile, the Wall Street Journal reported that the average seven-day money market account was yielding just 3.4% vs. 4.7% last September.
And according to Bankrate.com, the national average for a one-year CD was 2.75%, while a five-year CD was yielding just 3.09%.
You know it’s a very sorry state of affairs when income investors are actually wishing they could still get 4% a year!
For Baby Boomers, The
Timing Couldn’t Be Worse
Consider the facts:
Eighty million baby boomers are on the verge of retirement …
Millions and millions more need stable income right now …
And all the while, energy, food, and health care prices are shooting through the roof.
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| Ben Bernanke’s rate cuts are making it very hard for responsible savers and investors! |
As an income investor, I actually wish the Fed would consider the opposite approach — raising rates to squash inflation and reward responsible investors. But they’re not. And there’s no indication that they’re going to switch direction anytime soon.
Fortunately, there are income investments with yields that are steadily RISING. I’m talking about select dividend-paying stocks. In a moment, I’ll give you the name of one that is yielding 5.4% right now. But first …
If You Want Income, Here’s Why
You Can’t Afford to Ignore Dividends
Sure, the headlines have been full of bad news for equities. But if you’re interested in stable, growing income streams, I urge you not to ignore stocks that pay generous dividends.
If anything, the market’s malaise has made these stocks an even better alternative. Remember, when share prices fall, dividend yields naturally go up. Right now, plenty of firms are offering 5%, 6%, or more.
And after you lock in those rates, you have a good chance of getting even higher rates in subsequent years. All you have to do is choose companies that steadily increase their payments.
Let me show you how this concept, called yield on cost, works …
Say you buy a stock for $10 a share and it’s paying an annual dividend of $0.50. You’re immediately getting a nice yield of 5%. Not bad!
Now, what if the company boosts its dividend by $0.05 a share every year? Ten years later, the stock will pay an annual dividend of $1 a share.
Assuming the company has been doing well (this is almost a given if it’s been able to increase its dividend), your stock has probably risen in value. Let’s say it’s doubled to $20 a share.
If your dividend is now $1, the stock’s yield is still 5% (1 divided by 20). But is that the yield you’re actually getting?
After all, you only paid $10 for the stock. That annual dividend of $1 actually represents 10% of your original purchase price! That’s your yield on cost. Many investors fail to recognize this simple fact.
Are there risks? Of course. A company can reduce — or completely discontinue — its payments. But there are many firms that have been increasing their payments year in and year out for decades.
Those are precisely the companies I recommend to my Dividend Superstars subscribers. For example …
This Stable Utility Company Offers
A 5.4% Yield, and Has Increased
Its Dividend for 34 Years Straight!
In my Dividend Superstars, I have recommended Consolidated Edison (ED), the giant utility that operates in metropolitan New York.
The company’s record of rewarding shareholders is impressive. Not only are the shares currently yielding 5.4%, but Con Ed has boosted its dividend in each of the last 34 years.
Think about that for a minute. If you buy stocks like Con Ed, you’ll immediately get a better annual yield than you’d get from today’s money markets, CDs, or Treasury bonds.
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And unlike those investments, your yield on cost has the potential to go up every single year.
What’s more, despite temporary setbacks, the shares should also rise in price over time. I think that’s especially true in the case of Con Ed. In fact, I believe many utilities are getting more attractive with every Fed rate cut. Why?
First, utilities provide electric, gas, and water services, so their products are in demand no matter what the economy is doing. Never forget, the Fed is cutting rates because it’s very worried about our country’s growth prospects.
Second, the stability of utility businesses enables these companies to consistently pay their shareholders above-average yields.
Third, I expect more and more people will shift to these high-yielding stocks given the paltry yields from other income investments. That should also push up share prices for anyone who gets in ahead of the mad dash.
Fourth, utilities’ businesses benefit from lower interest rates, too. Because they have massive infrastructure, they tend to borrow a lot of money to keep things running smoothly. As interest rates move lower, they borrow at cheaper rates. Reduced operating costs equal bigger profits.
If there’s one point I want to make today, it’s this: You can’t change what the Fed is doing, but you can benefit from it. Look beyond the traditional categories … there are still plenty of choices for steady — and growing — income streams.
Best wishes,
Nilus
P.S. Con Ed is just one of many stable income stocks that I like. For all of my recommendations, subscribe to Dividend Superstars. The cost to Money and Markets readers is just $39 a year (half off the regular price)! And not only will you get 12 monthly issues, I’ll also rush you five special reports, that you can begin using immediately:
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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