Safe Yields in a Negative Rate World


In the 1963 comedy, “It’s a Mad, Mad, Mad, Mad World,” the words of a dying thief set off a frantic search for a hidden stash of loot.mad_world_scaled-620x853

In real life, the mad, mad, mad, mad policies of the World’s Central Bankers have set off a similar frantic search for income and yield. You can see it in the performance of various stock market sectors since the start of 2016.

Just look at a stock like Verizon Communications (VZ). The mega cap landline and mobile telecommunications company recently featured an indicated dividend yield of 4.3%, and it’s vastly outperforming the market, up more than 12% so far this year. Competitor AT&T (T) recently yielded 5.1%, and it is showing year-to-date gains of more than 9%.

How about the Utilities Select Sector SPDR Fund (XLU)? The $7.8 billion ETF is packed with the largest power and water companies in the U.S. It yields around 3.9%, and it’s up roughly 7%.

Consumer staples stocks? They’re doing very well, too. The Consumer Staples Select Sector SPDR Fund (XLP) doesn’t have as large of a yield premium – an indicated dividend yield of 2.9% recently, versus 2.4% for the SPDR S&P 500 ETF (SPY). So it’s only up 2.1% year-to-date. But that still beats the S&P’s 2.6% decline.

qeSo what gives? Is there a sound theory behind this action, and can you profit from it? The answer is yes! It all goes back to out-of-control Central Bank policy, and the “mad, mad, mad, mad interest rate world” we live in.

You see, global policymakers have been slashing interest rates to the bone…printing up trillions of dollars in Quantitative easing (QE) or what I like to call “funny money.” Their reasoning? to motivate the “savers” to borrowing and take risks for the next few years.

Early on in the credit and economic cycle, investors responded by chasing anything they could with yield, regardless of the associated risk, such as: junk bonds, emerging market debt, risky real estate, stocks paying double-digit dividend yields (but without the sound earnings and balance sheet strength to back those yields up.) Basically, Investors would take all of it willy-nilly.

But then the credit and economic cycle began to turn last year. Those riskier, higher-yielding investments started to tank. Central Banks then responded by doubling down – cutting interest rates into NEGATIVE territory, and launching even more QE.

This has spurred a different kind of hunt for yield, one marked by investors seeking yield AND safety. Rather than buying junk bonds that offer high yields but hefty principal risk, or higher-yielding energy stocks that may not be able to afford those yields for long, they’re turning to sectors like the ones I mentioned earlier.risky investments

I believe that’s a wise course of action, too. They’re the right kinds of names for this point in the cycle, and that’s why I’ve been over-weighting them in my own investment services.

If you’re looking for more guidance on these kinds of stocks, and how they behave at different points in the credit cycle, you’re in luck.

My educational course,How To Profit From Rising Interest Rates” goes into cycle analysis in detail. I explain which types of higher-yielding investments are the most appropriate at which phases in the cycle, and how you can tailor your portfolio appropriately. I definitely recommend you check it out by click here!

Until next time,

Mike Larson

Mike Larson is a Senior Analyst for Weiss Research, and is also the editor of Safe Money Report and Interest Rate Speculator at Weiss. A graduate of Boston University, Mike Larson formerly worked at and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.