Waiting and waiting
For those waiting for QE3, I think you may be waiting a long time. Sorry to rain on your parade, but I do not believe the Fed will act any time soon. They have little political motivation and remaining the status quo appears to be their current position. Unless we see another major catastrophe (think another financial crisis like 2008), the Fed will most likely remain on the sidelines for the indefinite future. So you as an investor need to be prepared for more pain ahead!
As it stands, the public is becoming increasing aware that simply “printing” more money will increase the likelihood of major inflation. Bernanke made this point in May of last year when he said:
“Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate. The trade-offs are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we – as we choose policy”
Despite Bernanke’s own admission that they have no intention of using more quantitative easing without a major reason to do so, the financial media keep telling us it’s right around the corner. We have now gone 13 months since the end of QE2 and have not seen any new easing. Instead, the Fed has solely repositioned its portfolio via Operation Twist (part I & 2) and given us a lot of lip service.
With the Fed simply holding regular FOMC meetings and speaking to the public they have managed to prevent the markets from collapsing thus far. Why would they need to implement another round of Quantitative Easing when they can keep stock prices higher simply through their verbal promises?
Think about this. Would you spend any money if you could get the same benefit without spending a dime? I mean you get all the gain with no real pain. That has been what the Fed has managed to do the past 13 months and they didn’t need to print any more money. That is why I believe the Fed will remain “paused” for the foreseeable future. They will simply interject with verbal promises when things begin to sour and the markets will rally. It’s like the puppet master controlling the strings. All the Fed has to do is speak up and the markets react without any real action.
Yet, this is a dangerous game of chicken. Remember, it was QE1 and QE2 that artificially lead stock and commodity prices higher. Since the end of QE2 (June 30th 2011), the S&P 500 has gone from 1320 to 1353 as of July 16th 2012. That is a gain of just 2.5% over the past 13 months (not even keeping pace with inflation and taxes). The Fed is slowly removing the training wheels they put on the markets the past few years. Just like a child learning to ride a bike, the markets are learning to move forward without QE. This means we could see a major spill or two. Are you prepared?
The stock market is a dangerous place to be right now without getting compensated for the risk. With that in mind, I believe we could see another downturn in the markets. In our P.A.C.E. portfolio we’ve already locked in six winning trades this year with not a single loser yet. We are in defensive mode and look for companies and opportunities that can compensate us for our risk. We look for strong opportunities that pay cash flow (dividends) and have strong upside potential (capital gain potential). By searching around the globe, we’ve been able to find interesting opportunities that have allowed us to benefit from the various developments in Europe and the global economy.
So where do you go?
I say load up on quality dividend paying stocks that pay at least at 3% dividend (to outpace the current rate of inflation). As I scan companies that have good upside potential, good downside protection, and pay at least a 3% dividend, I like more defensive positions in consumer staples, real estate, telecom, utilities, and healthcare. Here are 5 stocks to consider:
Consumer Staples: Kimberly Clark (NYSE: KMB). They have a current yield of 3.5% and have been paying dividends since 1935. They also have raised dividends for 40 consecutive years. Kimberly-Clark Corporation, together with its subsidiaries, engages in manufacturing and marketing health care products worldwide. The company operates in four segments: Personal Care, Consumer Tissue, K-C Professional and Other, and Health Care.
REIT: Digital Realty Trust, Inc. (NYSE: DLR) has a 3.7% dividend. They are a real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. It focuses on strategically located properties containing applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise datacenter users, including the information technology departments of Fortune 1000 companies, and financial services companies. The company’s property portfolio consists of Internet gateway properties, corporate datacenter properties, technology manufacturing properties, and regional or national offices of technology companies.
Utilities: Duke Energy (NYSE: DUK). Duke Energy has a 4.6% dividend. Duke Energy Corporation, together with its subsidiaries, operates as an energy company in the United States and Latin America. The company operates in three segments: U.S. Franchised Electric and Gas, Commercial Power, and International Energy. The U.S. Franchised Electric and Gas segment generates, transmits, distributes and sells electricity in central and western North Carolina, western South Carolina, central, southwestern Ohio, north central and southern Indiana, and northern Kentucky; and transports and sells natural gas.
Health Care: Abbott Labs (NYSE:ABT). Abbott has a current yield of 3.1% and has been paying dividends since 1926. They have had 40 consecutive annual dividend increases. Abbott Laboratories engages in the discovery, development, manufacture, and sale of health care products worldwide. The company offers adult and pediatric pharmaceuticals for rheumatoid and psoriatic arthritis, ankylosing spondylitis, psoriasis, juvenile idiopathic arthritis, and Crohn’s disease; dyslipidemia; HIV infection; prostate cancer, endometriosis and central precocious puberty, and anemia caused by uterine fibroids; respiratory syncytial virus; adult males who have low testosterone; secondary hyperparathyroidism; hypothyroidism; and pancreatic exocrine insufficiency, as well as anesthesia products.
Telecom: BCE Inc. (NYSE: BCE) pays a 5% dividend. They provide wire line, wireless, Internet, and television (TV) services to residential, business, and wholesale customers primarily in Canada. The company offers local telephone and long distance services under the Bell Home Phone brand; direct-to-home satellite TV services under the Bell TV name; personal video recorders and online access services; Internet protocol (IP) TV services under the Bell Fibe TV brand; and local exchange carrier services. It also provides data services, including high-speed Internet access services under the Bell Internet name; IP based services; information and communications technology solutions comprising professional, managed, and infrastructure services; and legacy data services.
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