With the volatility of the financial markets, there is renewed pressure upon the Federal Reserve to do something – we are just not sure what.
Chairman Bernanke responded that the Fed will keep short-term interest rates essentially at zero for the next two years. I suppose Bernanke has a crystal ball allowing him to see two years into the future – or he is under political pressure to light a fire under the economy before the presidential election.
This has consequences. If an investor is so inclined, they can lend money to the government via a 10-year Treasury bond. In return, the government will pay you interest of 1.99 percent per year. If 10 years is too long, then consider a two year Treasury paying a dreadful 0.21 percent. Don’t spend that interest all in one place.
Despite record low interest rates, unemployment continues to be well above 9 percent nationally and appears it will stay there.
At the same time, inflation relative to things like food and gas is increasing more than 3.5 percent per year.
Inflation, combined with record low interest rates, is putting huge pressures upon anyone looking to make ends meet.
While we sympathize with them, we expect the Fed to make matters worse before they improve.
Currently, the Fed is looking at a variety of schemes to stimulate the economy. All are designed to inject cash into our financial system to make borrowing as attractive as possible. This means the Fed will do everything imaginable to keep interest rates low as long as possible.
We question the legitimacy of any of these strategies. However, those decisions are above our pay grades.
For our clients, we are faced with producing cash flow to do crazy things like eat and pay for air conditioning.
Twenty years ago, the conventional wisdom assumed that investors could take a portion of their portfolio, put it in fixed income securities and produce 6 percent interest. That is wishful thinking today.
For retirees, and anyone else needing spending money, the choices are rather slim with one exception – blue chip stocks. I recognize the questionability of telling retirees to put money in the stock market – especially given the volatility experienced since late July.
However, if an investor has a long time frame – meaning 10 or more years – and they can stomach the daily volatility of the stock market – that may be the best place to maximize cash flow.
Many blue chip multi-national stocks now trade at similar valuation levels as during the depths of the market selloff in 2008-09.
Furthermore, the dividend they pay is often 3 percent or higher. In fact, the 30 stocks in the Dow Jones Industrial Average currently pay an average dividend of 3.13 percent and six of those pay better than 4 percent.
The strongest of the blue chip stocks also have very robust balance sheets, meaning that in the depths of a downturn, they will not only have the best chances to survive – they will thrive. This means they have a very consistent habit of increasing the dividend to their shareholders on a regular basis. As such, the dividend you start with today is not the payment you might get ten years from now.
Obviously, the stock market is neither a perfect solution nor one that works for all. However, if you can stomach the volatility, I would rather have the consistent and increasing cash flow from a well diversified group of blue chips than a hollow 2 percent promise from a Treasury bill.
Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.
Originally published Tuesday , September 6, 2011
Victoria Advocate