An Alternative To Money Market Funds
Sarasota Herald Tribune and Naples Daily News
November is behind us. Investors around the world now await the Federal Reserve’s verdict on interest rates. The Fed will meet for the final time this year on December 15 - 16. It is widely expected the Fed will raise rates by 25 basis points at this meeting. It is probable the Fed will make clear that the increase is small and that the Fed will be patient about raising rates going forward in 2016, which just happens to be a Presidential election year.
As I have noted previously, the amount of US Treasury debt outstanding, nearly $20 Trillion, limits the ability of the Fed to raise rates. If the overall interest rate on this debt rose by 1% (100 basis points) the Federal budget deficit would rise by $200 Billion annually. This sum is arrived at as follows: (1% multiplied by $20 Trillion equals $200 Billion). For the 2015 fiscal year, which ended on September 30, the US budget deficit was $439 Billion, despite record tax revenues as per the Congressional Budget Office.
Over the past few weeks, a number of S&P 500 companies cited the strong greenback as the reason for reporting disappointing revenue. S&P 500 firms that generate a large amount of revenues overseas would be harmed even more should the Fed decide to push interest rates aggressively higher.
As a result, investors can expect to see the current low interest rate environment to continue for years to come. I strongly encourage people with substantial holdings of municipal bonds to consider allocating a portion of these funds to well known S&P 500 companies with a history of raising their dividends. For example, AT&T has raised its dividend 31 straight years. Later this month, its Board is widely expected to raise the dividend again for the 32nd straight year. Do you know anyone who owns a municipal bond that increases its coupon rate annually? There is a reason these products are called Fixed Income!!
For this reason we continue to recommend maintaining a defensive stance in our investment approach. The major telecoms, consumer staples, utilities, major oils and the oil and gas pipelines are financially stable and have a history of increasing their dividends annually.
Besides AT&T, some examples are Verizon, McDonald’s, Coca Cola, Pepsi, Procter & Gamble, Consolidated Edison, Southern Co., Exxon, Conoco, Occidental Petroleum, Kinder Morgan and many more. These companies offer generous dividend yields with the opportunity for significant capital gains over the next year. And if an investor holds the shares for at least 61 days, all of the dividends are taxed at the favorable 15 - 20% tax rate, depending on the investor’s tax bracket.
My weekly radio show on WWPR 1490 AM airs at 2pm each Friday. The show can also be heard live on the station’s website (www.1490wwpr.com). My prior radio shows and news columns are available on my firm’s website (www.amescapmgmt.com).
If you are unhappy with the returns now offered by money market funds feel free to contact us.