Fed’s QE2 gives new allure to credit, dividend stocks

By Kevin Weir and Duncan Balsbaugh

BOSTON (BestGrowthStock) – Investors who are convinced the Federal Reserve will push down market interest rates with its latest bond-purchasing program should focus on buying high quality corporate credits and equities with generous dividends.

The Fed said last week it planned $600 billion in new purchases of Treasuries in addition to its previously announced program of reinvesting principal payments from agency debt and mortgage-backed securities into U.S. government debt.

Fixed income and other financial markets have been roiled in the past 24 hours by worries the Fed will succeed only too well at its goal of reviving inflation.

However, many still think lower yields are in store because the Fed’s buying of Treasuries will shrink overall amount of high-quality debt available for investors.

The implication of a shortage of Treasuries is that the Fed is right to be concerned, and that there is some risk of a double-dip recession, even though some economic data has improved recently.

That in turn suggests that while corporate debt should be owned, investors should focus their purchases on better quality credits.

The risk is that the fixed income market will continue to be extremely data dependent, and that a run of weak data will widen corporate spreads back out, which would be particularly pronounced in the case of weaker credits.

Another approach, in addition to high quality corporate paper, might be to buy equities offering decent dividends — say, 3.0 percent or higher.

Companies doing a fair amount of cross-border business, and hence benefiting from a weaker dollar, should be particularly desirable. It might be possible to construct a strategy to take advantage of spikes in volatility to write calls against stocks with decent dividends.

Several ETFs offer exposure to stocks with both high dividend yields and long histories of increasing payouts, as well as various slices of corporate credit.

There are also mutual funds that specialize in writing calls against high-dividend stocks.

The goal, of course, would be to hang on to the stock through the ex-dividend date while having the options expire worthless.

Since surges in volatility tend to coincide with drops in equity prices, it might be possible to gain decent premium income on dips while writing at sufficiently high strikes to make retaining the stock a fair bet.

Fed’s QE2 gives new allure to credit, dividend stocks