Understanding The Taper and Its Effect on Your Fixed Income Portfolio

quantitative-easingIt’s time to clarify how quantitative easing affects the market. QE critics say it artificially props up the market, that it will cause inflation, and that it has killed fixed income investing. There is some truth to these criticisms, so here’s what to watch for with stocks, why bond yields have cratered, and how to find other fixed income investments.

Normally, the US might see 1.8 – 2% real productivity growth and about 1% population growth. Consequently, real GDP growth should be around 2.8 – 3% annually. Instead, we’re stuck in the 1-2% range.

The root cause for this slow growth goes back twenty years. The American consumer and government borrowed trillions against the future’s GDP. Now, the American consumer is paying off that debt and it will take just as long to pay off as it did to accumulate, if not longer. Thus, the economy won’t grow without having all that borrowed money.

So what can be done to keep the economy afloat?

That’s where quantitative easing comes in. The Fed prints money to buy bonds issued by the Treasury. This keeps interest rates low, encouraging businesses to borrow at cheap rates, in order to help move the economy along. This injects 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.

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).

About Lawrence Meyers

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 protected]

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
HTML Snippets Powered By : XYZScripts.com