Earlier this week the Fed made a historic move. The Federal Reserve moved interest rates lower to a target of 0-0.25%. In their statement, they warned that interest rates would have to stay at this historically low level for quite some time because of the huge threat to our nation’s economy. The Federal Reserve said that it is no longer concerned with inflationary pressures and it has shifted its stance to supporting the functioning of the financial markets and the stimulation of the economy as a whole.
One has to stop and think for a moment, what the Federal Reserve did was make interest rates virtually zero. Clearly this is to try to jump start the economy and get some investments and lending going. The one thing that sometimes gets lost in the shuffle is the fact that so many of the safe and guaranteed investments such as certificates of deposits and money market savings accounts are now going to be yielding next to nothing. For those of you who have been using things like certificates of deposits, or simple savings accounts, I suggest an alternative to you.
It seems to me that the Federal Reserve has just made high dividend yielding stocks a very valuable asset class. There is one big caveat to this though, not all dividend yields are created equally and you need to make sure the high dividend yielding stock you are looking at is safe. How can you tell which dividends are safe and which aren’t? The best way to find a safe dividend yield is to look at the company’s balance sheet and income statement. If the company has a lot of cash on hand a strong current ratio (assets/liabilities), then that is a good start. The second thing is that the company should have strong free cash flow, which gives it the ability to pay shareholders a healthy dividend yield. Thirdly, I like to look for companies who have consistently raised their dividend payout year after year because this tells me they feel very secure in their dividend payout. Companies like Proctor and Gamble and Johnson and Johnson fit the bill, with both having raised their dividend yield for over 45 years in a row. Please note this is not a recommendation of these stocks, but rather just an example of dividend growers.
The fact is, dividend yielding stocks are becoming very valuable because their dividend alone will be much higher than you can get from the bank. Add in the fact that you have the potential for price appreciation and you are getting a pretty good deal. Consider high dividend yielding stocks in this period of low interest rates.