Saturday, August 13, 2011

Interest Rates

On Tuesday August 9th the Fed took an unprecedented step and announced a definitive time frame for low interest rates (0.25%) they stated they would stay at the low rate at least through mid-2013.  With the guarantee that rates will be low for two years, the 2 year treasury yield reached 0.17% which is a record low.  That is the equivalent of leaving your money under a mattress.

But what do low interest rates really mean?

This means that people have limited choices as to where to put their money to protect themselves from inflation which has been at about 3.6% over the past 12 months.  Clearly fixed income tools such as bonds and CD's will pay very little interest and will provide no protection against inflation.  Checking and savings accounts offer low rates that will not protect against inflation either. Sure these options seem safe since the money won't be lost but low yields are not beneficial.

That is why low interest rates are good for stocks, investors who wish to fight inflation will have to go to the market because every other financial instrument will bear low yields for the next 2 years. 

With the market as volatile as it has been investors may delay their entry but when they do come back they will want higher returns.  High yield dividend paying stocks will most likely be their choice.  With some stocks paying 4.00% in dividends this will not only be a strategic move to fight inflation it will be a capital gain opportunity. Stocks are fairly cheap from where they where a few weeks ago. 

I like to follow baby boomers and their trends they are a large market and typically move in a similar pattern.  Dividend investing is hot among retirees and others who wish to live off their savings.  It is obvious that fund managers/certified planners will see dividend stocks as the investment choice to fund the retirement of baby boomers.  In our present economic state this has to create a huge demand for these stocks. Where else will they find attractive yields?  Boomers will be looking for solid companies that will increase yields, companies that are sitting on a lot of cash.  They will need this extra hedge to fund their lengthy retirement due to their longer life expectancy as a result of modern medicine.

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