An Alternative To Money Market Funds
February is behind us. What a month it was! Crude oil prices rallied above the $30 per barrel level. It needs to move higher though as several large oil companies were forced to slash their dividends and reduce their capital expenditures and headcount for 2016. And despite the large drop in gasoline prices, consumers are not spending the savings as the recent quarterly results from retailers Walmart, Kohl’s and Nordstrom demonstrate. The S&P 500’s two best performing sectors year to date are the Telecoms and Utilities, highlighting how defensive investors have become.
Meanwhile, the strong US Dollar and the continued weakness in emerging markets in Asia and Latin America is hampering many US multinationals. Last month, both Caterpillar and Deere, two of the world’s largest capital equipment firms, cut their 2016 forecasts due to the strong dollar and weakness overseas. Citigroup announced it was exiting its retail banking operations in Brazil, Colombia and Argentina as the deteriorating economic picture there takes its toll. Citi has operated in this region for over a century according to the New York Times.
The Fed will next meet March 15-16. Fed Chair Janet Yellen testified before both the US House and Senate last month and admitted the Fed was considering a negative interest rate policy to stimulate the US economy. Negative interest rates are now offered in Japan, Sweden, Germany and Switzerland. Amazingly, at the end of February, the yield on the 10 Year US Treasury was more than 10x the yield on the comparable 10 Year German Bund.
Several large S&P 500 firms raised their dividends in February. Despite its problems, Walmart raised its dividend for the 43rd consecutive year, increasing the payout from $1.96 on an annual basis to $2.00 per share. Home Depot increased its quarterly dividend by 17% from 59c to 69c per share. This was the seventh straight year Home Depot has raised its quarterly dividend. Pepsico’s Board increased its quarterly dividend by 7% effective with the June payment making it 44 straight years Pepsico has increased its dividend.
In April, Southern Co. is expected to raise its dividend for the 15th straight year while Exxon is expected to raise its dividend for the 34th consecutive year. Exxon is currently one of the few American companies with its debt rated AAA. Its debt is being reviewed, however. These firms offer generous dividend yields and the potential for large capital gains over the next year. If an investor holds the shares of an American company for at least 61 days, all of the dividends will be taxed at the favorable 15-20% tax rate, depending on the investor’s tax bracket.
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