Ben Bernanke doesn’t like it when people save money.
The Fed Chairman is on record saying it’s bad for the economy.
His reasoning is based on an old theory known as "The Paradox of Thrift," which argues that the act of saving money — or "hoarding," as he would call it — reduces overall productivity in the economy.
One consequence of Bernanke’s philosophy is that banks don’t pay a decent interest rate on savings. Convenient, considering his shareholders are the big banks, and they play a large part in Fed decisions.
Under Bernanke, the Federal Reserve has pushed rates to record lows and promised to keep them there for an "extended period." Analysts think that could mean 5+ years of near-zero borrowing rates for banks.
Disaster for Retirees
Extended low interest rates are a nightmare for baby boomers… 1.5% CDs aren’t going to pay the bills, especially if inflation takes off as many think it will. To add insult to injury, that puny 1.5% yield is taxable. If you factor in 4% inflation, CD holders are basically losing 3% a year.
Take a look at this chart, which shows the average 1-month rate on CDs over the last 45 years:
Prior to 2001, CD rates didn’t drop below 5% for long. The 5% level has long-been viewed as a "fair" level of return on cash. It allowed savers to enjoy a little income from their deposits, but also allowed banks to make healthy profits.
That era is over — Bernanke and the White House have made that clear. They’re willing to do whatever it takes in order to save big banks. It’s the state of American politics.
Short term is all that matters. Kick the can down the road as long as you can, blame the other party, rinse, repeat.
Sure, retirees could move into riskier assets like Junk Bonds or high-yielding REITS. The point is, they shouldn’t have to.
Great for BanksThese low rates may be bad for savers and retirees, but they’re fantastic for American banks. They can borrow near 0%, then turn around and lend at 5%-10%. Or just buy treasury bonds and get a (relatively) safe 2-4% yield.
Being a banker in this system is a great deal if you can get it, as my colleague Steve Christ wrote. His piece is a good primer on how profits are made in the banking system.
Looking for Yield
Assuming these realities don’t change anytime soon, where can we look for income? REITs, blue chips, corporate bonds?
I don’t like REITs here. They’ve bounced too far, and eventually that long-anticipated commercial real-estate shoe has to drop. Corporate bonds aren’t bad, but they are vulnerable to inflation and rising interest rates.
A portfolio of dividend-paying stocks is arguably the best way to get income these days. With a good high-yielder, you get steady dividends, the potential for price appreciation, and protection against inflation.
Here are a few of my favorites:
Chevron (NYSE: CVX)
Chevron is a cash machine. The stock price has pulled back with oil and gas, and it currently yields 3.8%. Here are some vitals:
- P/E: 13.5
- Fwd P/E (estimated): 7
- Debt: $10.5b
- Yield: 3.8%
- Payout Ratio: 51%
Philip Morris International (NYSE: PM)
If you have no qualms about peddling tobacco, Philip Morris International pays a healthy 4.6% yield. And unlike in America, smoking is still a growth industry overseas. Here are some key stats:
- P/E: 15.6
- Fwd P/E (estimated): 11.6
- Cash: $1.6b
- Debt: $14.2b
- Yield: 4.6%
- Payout Ratio: 71%
While PM’s debt is higher than I usually like, they generate plenty of cash to cover the interest.
Kimberly Clark (NYSE: KMB)
Kimberly Clark may not be familiar to you, but their brands are: Kleenex, Cottonelle, Huggies, Depends, and Kotex. I’d say toilet paper and Kleenex are as recession-proof as they come. Key stats:
- P/E: 13
- Fwd P/E (estimated): 11
- Cash: $798m
- Debt: $6.4b
- Yield: 4.1%
- Payout Ratio: 53%
Select Dividend ETF (NYSE: DVY)
Yeah, I’m cheating. DVY is technically an ETF. But for those who prefer diversification and ease of passive investing, DVY is a good option. It holds a basket of 100 large, high-yield stocks. No REITS are included in the index.
- Average P/E of holdings: 13
- Yield: 3.89%
If you’re looking for more guidance picking dividend stocks, I strongly recommend my colleague Steve Christ’s Wealth Advisory service. Steve specializes in value and dividend stocks. Throughout this crisis, he’s done a remarkable job preserving his readers’ money while making sure they get some healthy dividends along the way.
Until next time,
Analyst, Wealth Daily