For the past five-plus years, the Federal Reserve has been trying to stimulate growth through “quantitative easing,” a fancy term for buying Treasury bonds that amounts to injecting trillions of newly printed dollars into the economy. Fears that this would cause inflation to skyrocket haven’t been realized because consumers have ramped down credit-fueled spending. But one thing QE has accomplished – it’s driven down interest rates so much that it’s cut sharply into bond-buyers’ income stream, and they’re not going to rediscover that lost income in bonds for years. To see a list of high yielding CDs go here. One of the Fed’s QE goals has been to drive investors out of bonds and into the stock market, and it’s worked. After bottoming out in 2009, the Dow and the S&P 500 have more than doubled. But its other goal – stimulating economic growth – hasn’t worked nearly as well. Normally, the U.S. should see real GDP growth of 2.8 – 3% a year, but instead we’re languishing in the 1-2% range. Nevertheless, there are many solid U.S. stocks experiencing organic growth that offer dividend yields far more attractive than you can find in bonds. Foreign investors seeking attractive yields know it – witness the acquisition of AMC movie theaters by the Chinese company, Wanda. Expect more of this. And, as long as yields remain low, the stock market will continue to be okay unless and until another downgrade of the U.S. government’s credit rating. For those seeking fixed income, there are three places I would look.
The first is blue-chip dividend companies like AT&T (T), Intel (INTC), Altria (MO), Philip Morris International (PM), and Verizon (VZ) They pay 5.7%, 3.7%, 5.4%, 4.7%, and 4.58%, respectively. These are companies with varying earnings growth rates, but all with a solid abilty to continue to pay dividends. Second, look at preferred stocks. These stock-bond hybrids provide terrific stability because their price tends to move in a narrow range while throwing off yields of between 5% and 9%. I like hotel REITs, including Ashford Hospitality Trust (AHT) Series D, which currently yields 5.40%, but 8.45% at par. Strategic Hotels and Resorts (BEE) Preferred A shares pay 8.51%. Citigroup (C) has a Series J that pays 8.24%. JPMorgan Chase (JPM) Series J pays 8.18%. You can also grab an ETF with the iShares S&P U.S Preferred Stock Index (PFF) that pays 6.42%. I’d also look at the offerings of Public Storage (PSA).
Finally, I like Business Development Companies. BDCs provide debt and equity financing to established, fast-growing small private companies. What makes successful BDCs so attracive is that they pay out 90% of their annual tax income each year as a dividend. Prospect Capital (PSEC) invests in late-stage venture, middle-market, and mature companies, and pays a monthly dividend (11.9% annual rate). Triangle Capital (TCAP) focuses more on leveraged and management buyouts, acquisition financing and growth financing. It pays 7.3% annually and distributes quarterly. BlackRock Kelso (BKCC) yields about 11.3% and is one of the premier names in private equity. UBS ETRACS Wells Fargo Business Development Company ETN (BDCS) pays about 7.16%.
About Lawrence Meyers Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at email@example.com.
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