Investing with Zero Interest Rates

It is a difficult question. Where to invest when cash and money markets are paying zero? The majority of people within the investment community will tell you to search for yield by moving into municipal bonds, high yield bonds, and high dividend stocks. However I have noted that people make the serious error of investing in risky assets just to get a high yield. This is especially true with high dividend stocks, which appear to be a good value. After all who would not want an easy 5-7% yield?

Unfortunately this is a dangerous trap investors fall into which can lead to large losses. If a stock is a high yielder, than there is a valid reason why. The only exceptions to this are tobacco stocks (more on them later). The major reason stocks have a high current yield is because the market expects the company to slash their yield within the next year. I noticed this in late 2007 into early 2008 with bank stocks and reits. This was a trap, which many people got caught in. So regarding high yield stocks (tankers, some mortgage reits, etc) buyer beware.

Even if you think the economy is going to be strong for the next few years there is little upside in high-yield bonds. While the upside is low the downside is quite high. From a risk versus reward this is not a good investment. The point is don't take large risks in search of high-yield investments.

All right so you are convinced that high-yield bonds are risky and you are considering municipal bonds. Be careful, municipalities are in serious trouble across the country and face financial ruin if not remedied. These municipalities have been spending more than they earn for years and are in debt up to their eyeballs. Most likely we will see municipal defaults in the coming years. One last thing to remember is that if you do purchase municipal bonds you need to be willing to hold to maturity. Why? Interest rates are at all-time lows and have only one way to go. As interest rates rise bond yields fall.

So what are some good investments?

Consumer Staple stocks who have pricing power such as Procter & Gamble, Johnson & Johnson, Colgate-Palmolive, etc. These stocks sell things that people have to buy regardless of economic conditions. You will never get rich owning these stocks but they are stable investments that over time keep beat inflation and give you a real rate of return. The only downside to these stocks is their low yields ranging from 2-3%. But these type companies usually raise their dividends year after year which helps.

Tobacco Stocks--You would think that cigarettes have been banned by now but believe it or not tobacco companies are still alive and very profitable. Companies like Altria, Reynolds, Lorillard, and Philip Morris International. These stocks all pay large and sustainable dividends, which are usually increased every year. These stocks yield between 4.5-7%. These companies have a superior business model: they sell an addictive product. I personally own Altria and reinvest the dividends every quarter.

Gold--Along with select stocks gold is a good investment during periods of negative real interest rates. One of the knocks against gold is that it does not earn anything. True but when you are investing in a zero interest world gold suddenly looks more appealing. At least with gold you have a chance to maintain your purchasing power compared to cash, which is guaranteed to lose money in inflation adjusted terms. Along with gold other precious metals such as silver, platinum, and palladium work well.

I have not discussed resource and commodity stocks on purpose. These are highly volatile stocks, which could fall large amounts and result in a permanent loss of capital. This article is to show where you can park money as opposed to simply leaving it in the bank or money market. Under these circumstances you want to take as little risk as possible knowing that you are not going to make a fortune in these investments.

The main point of this article is to inform you of the risks of purchasing high-yield investments in order to escape zero interest rates.

Black Swan Insights

Legal Disclaimer
I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)


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