Cash Just May Be Your Riskiest Investment
Quantitative easing (QE), it is such a benign sounding term. It is somewhat relaxing rolling off your lips. Unfortunately, this rose has thorns. QE in simple terms is the government printing money and buying financial assets (e.g. bonds, etc.) in an effort to stimulate the economy. A side effect of QE is higher prices of the financial assets bought, which in turn lowers their yield.
Stocks surged last Wednesday in anticipation that the Federal Reserve is considering a new economic stimulus in the form of quantitative easing. In addition to another round of QE (QE3?), some investors are speculating that the Fed could extend its program of swapping short-term bonds for long-term bonds in an effort to to hold down yields on 10-year and 30-year bonds.
Lower yields on debt instruments is not the only side effect of QE. Another and more serious side effect is the devaluation of our currency. Printing fake money to solve real problems has never succeed. Germany, Yugoslavia, and many others, have provided textbook examples of the futility of such an exercise - it always ends in a financial disaster!
If the the U.S. Government is monetizing the debt, the dollar will continue to fall against strong currencies and assets with real intrinsic value such as commodities. Two things you don't want to be holding when the government starts printing money are:
1. Debt (someone owing you)
As more dollars are created, the the ones already in circulation are worth less, and if you hold debt, you will be paid back with devalued dollars. As a side note, it is to your advantage to owe cash since you will be the one paying it back with dollars that are worth less. So what can you do?
If you believe it is just a bump in the road, then a more focused concentration on quality multinationals such as these may be the best solution:
The Coca-Cola Company (KO) | Yield: 2.7%
The Coca-Cola Company is the world's largest soft drink company with a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 50 consecutive years.
McDonald's Corporation (MCD) | Yield: 3.2%
McDonald's Corporation is the largest fast-food restaurant company in the world, with about 33,500 restaurants in 119 countries. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 36 consecutive years.
Abbott Laboratories (ABT) | Yield: 3.3%
Abbott Laboratories is a diversified life science company that is planning to split into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 40 consecutive years.
Johnson & Johnson (JNJ) | Yield: 3.4%
Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 50 consecutive years.
The Procter & Gamble Company (PG) | Yield: 3.6%
The Procter & Gamble Company is a leading consumer products company that markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 55 consecutive years.
If you believe it more than just a bump in the road, exposure to international energy companies may be beneficial, such as:
ConocoPhillips Co. (COP) | Yield: 4.9%
ConocoPhillips Co. is a leading integrated oil company. It plans to spin off its downstream operations as a new publicly traded company, Phillips 66. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 12 consecutive years.
Chevron Corporation (CVX) | Yield: 3.6%
Chevron Corporation is a global integrated oil company (formerly ChevronTexaco) with interests in exploration, production, refining and marketing, and petrochemicals. The company has paid a cash dividend to shareholders every year since 1912 and has increased its dividend payments for 25 consecutive years.
Exxon Mobil Corporation (XOM) | Yield: 2.8%
Exxon Mobil Corp. formed through the merger of Exxon and Mobil in late 1999, is the world's largest publicly owned integrated oil company. The company has paid a cash dividend to shareholders every year since 1882 and has increased its dividend payments for 30 consecutive years.
Continuing down the sliding scale, if you believe the problem will continue to grow and the dollar will lose much of its purchasing power, consider companies with dividends denominated in a foreign currency:
Philippine Long Distance Telephone Co. (PHI) | Yield: 5.4%
Philippine Long Distance Telephone Co. provides telecommunications services in the Philippines. It operates in three segments: Wireless, Fixed Line, and Information and Communications Technology.
Empresa Nacional de Electricidad S.A. (EOC) | Yield: 4.3%
Empresa Nacional de Electricidad S.A. generates electricity in Chile, Argentina, Brazil, Colombia and Peru.
Astrazeneca PLC (AZN) | Yield: 9.4%
Astrazeneca PLC formed via the 1999 merger of Zeneca Group PLC of the U.K. and Astra AB of Sweden, is one of the world's leading drug companies.
Shaw Communications (SJR) | 5.0%
Shaw Communications is a Canadian communications company that provides broadband cable television, Internet and satellite direct-to-home services to apx. 2.3 million customers.
Personally, I believe the Treasury has already printed enough money to cause future problem. Given the size of the U.S. debt, it would be difficult for the government to allow interest rates to rise - it simply couldn't afford to pay interest on the debt. We are left with two questions: 1. How big will the problem turn out to be and 2. How long will it take us to recover?
Full Disclosure: Long ABT, JNJ, KO, MCD, PG, COP, CVX, XOM. See a list of all my dividend growth holdings here.
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