An Alternative To Money Market Funds
Low interest rates continue to be one of the surprising developments for investors in 2014. On Wednesday, September 17, US Federal Reserve Chairwoman Janet Yellen made clear that low interest rates would remain the Fed’s policy “for a considerable time”. This news helped lift both the S&P 500 Index and Dow Jones Industrial Average to new record highs.
Upon closer analysis, it is hard to see how the Federal Reserve can aggressively raise rates in the near term. A big reason for this is the amount of US Treasury debt outstanding. This sum has grown by more than a trillion dollars in the past 12 months as reported September 16 by Tyler Durden in the zerohedge.com website.
By the time President Obama leaves office, the US Treasury debt will have more than doubled in size. Another concern is the US budget deficit. For the first 11 months of this fiscal year, despite record tax receipts, the US has a budget deficit of $589 billion!! And there is still a month to go!!
Low interest rates are not limited to America. Earlier this month, the 10 year German Bund was yielding less than 1% while the 2 year German Bund was yielding less than zero. A report from Bloomberg.com dated September 17 said, “Banks are cutting their bund-yield forecasts at a record pace as they bet the European Central Bank’s latest stimulus program will be expanded to buying the sovereign debt of member states.” So, low interest rates will likely 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, China and Western Europe appears to be cooling. Companies with a history of raising their dividends should be of particular interest to investors seeking improved returns over what money market funds and other fixed income investments now offer.
So where does one look for good dividend yields? For us, a good starting point is companies that have increased their quarterly dividend annually for many years. There are numerous companies in the S&P 500 who have done so for 30 or more years including: AT&T, Coca Cola, Walmart, 3M, ExxonMobil, and Procter & Gamble. And since 2007, Verizon has been raising its dividend annually while Chevron has boosted its dividend annually since 2009. All of these companies have solid cash flow that can withstand difficult economic times.
Unfortunately, we are presently in uncertain times. Russia continues to threaten Ukraine while the Middle East remains in turmoil. Terrorism continues to be a concern in Europe, America and other nations as well. Even so, the S&P 500 and Dow Jones Industrial Average will likely continue to trade higher as there really is no alternative to the equity markets.
If you are unhappy with the returns offered by money market funds, feel free to contact us.