ARTICLES

An Alternative To Money Market Funds

February 2016

January is behind us. What a month it was! There was amazing volatility around the globe. Crude oil prices drifted lower cracking the $30 per barrel level. Other commodities suffered similar declines. Meanwhile, the US Dollar has rallied strongly against other major currencies. The strong Dollar complicates the Federal Reserve’s desire to raise rates after the 25 basis point rise in December.

The Fed will next meet March 15-16. Fed Chair Janet Yellen made clear in December that future rate increases would be both “gradual” and “data dependent” so it will be interesting to watch what happens when the Fed meets. Other scheduled Fed meetings will take place on Apr 26-27, June 14-15, July 26-27, Sept 20-21, Nov 1-2 and Dec 13-14.

Back in December, President Obama and Congress reached an agreement on the Federal budget. As per the Congressional Budget Office (CBO), the deficit will grow to $544 billion in this fiscal year, up from $439 billion in the 2015 fiscal year. Even more troubling, the CBO now sees the deficit growing to over $1 trillion in 2022.

The size of the budget deficit, combined with the nearly $20 trillion in debt issued by the US Treasury severely limits the Federal Reserve’s ability to raise rates. As noted in prior columns, if the overall interest rate on this debt were to rise by 1% (100 basis points) the Federal deficit would rise by $200 billion annually (1% multiplied by $20 trillion equals $200 billion).

The debt mess in Puerto Rico continues to get worse. Its utility, PREPA failed to reach a settlement with its bondholders on its defaulted debt in January. There really is no hope in sight. As the problems in Puerto Rico demonstrate, there are risks in owning municipal bonds. For investors with sizable holdings in municipal bonds, I encourage you to consider investing in S&P 500 firms with a history of increasing their dividends on an annual basis.

In December, AT&T “T” increased its quarterly dividend for the 32nd straight year. Last month, Consolidated Edison “ED” raised its quarterly dividend for the 42nd straight year. That is the longest successive increase of any utility in the S&P 500. Last month Dominion Resources “D” increased its quarterly dividend for the 13th straight year. In April, Southern Company “SO” is expected to increase its quarterly dividend for the 15th straight year.

These companies offer both generous dividend yields and the potential for large capital gains over the next year. If an investor holds the shares for at least 61 days, all of the dividends will be 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 (1490wwpr.com). Archived broadcasts of each show are also available on my firm’s website here. Enjoy!

If you are unhappy with the returns offered by money market funds, feel free to contact us.

 

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