An Alternative To Money Market Funds
Low interest rates continue to be one of the surprising developments for investors in 2014. As the year began, a number of market strategists predicted that interest rates would dramatically rise during 2014. But as we have seen, this has not happened.
Earlier this month, the 10 year German Bund was yielding less than 1% while the 2 year German Bund was yielding less than zero. The 2 year German Bund recently offered investors a yield of minus .004%. Meanwhile, the yield on the 10 year US Treasury note has been yielding less than 2.50% for a good part of 2014. On August 15 it reached a low yield of 2.30%. It is safe to say that low interest rates will remain with us a good deal longer.
For this reason, S&P 500 stocks with good dividend yields will continue to be in demand. This is so even as signs emerge that the economy in the US, Canada and Western Europe appears to be cooling.
Just this month, two of the world’s largest retailers, WALMART and TARGET, reduced their earnings guidance for the rest of the year. WALMART Chief Financial Officer Charles Holley observed “During the first half of the year, we saw consumers in both mature and emerging markets curb their spending, and we believe these trends will persist through the remainder of the year.”
Nevertheless, the S&P 500 and Dow Jones Industrial Average continue to trade higher with the S&P 500 reaching an all time high earlier this month. Low interest rates and the safe haven status of the United States makes the US market a desirable location for investors around the world. Merger and Acquisition activity also has helped fuel the recent rally in the US market.
Earlier this month, our clients purchased shares of Lorillard “LO” @ $60.20 per share. Back on July 15, LO agreed to be acquired by Reynolds American “RAI” in a cash and stock deal valuing LO at $27.4 billion including the assumption of debt. If completed, this transaction will combine America’s 2nd and 3rd largest tobacco producers. Both companies are also members of the S&P 500 index.
LO shares now yield over 4%. In announcing this transaction on July 15, LO’s Board stated in the Press Release that its quarterly dividend would be maintained until the deal is completed. LO expects this deal to be completed during the first half of 2015 pending shareholder approval and regulatory approval. Financing is in place and each company’s Board has approved the deal.
On August 15, LO’s Board declared a quarterly dividend of 61.5 cents. This dividend will be paid September 10 to holders of record as of September 1. This transaction is another example of a strategy known as Dividend Captures, which our firm employs. This low risk strategy often provides investors with annualized returns of 20% or more. If you are unhappy with the returns now offered by money market funds feel free to contact us.