High-yield stocks
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How to Find High-Yield Investments in a ZIRP World
Frankly, thanks to the U.S. Federal Reserve, it's surprising we have not seen a savers revolt in the United States.
We can debate how effective the Fed's Zero Interest Rate Policy (ZIRP) has been, but one thing is unquestionable: Those who rely on income from investments that are cautious and conservative have been brutally punished.
Traditional safe income havens like Federally Insured Certificates of Deposit and Treasury bills offer a minuscule return. It is not possible to retire and live off the interest earned on your savings unless you have several millions stashed away. Even then the return from conservative savings options will not provide a very luxurious retirement.
And according to Fed Chairman Ben Bernanke this condition will exist until at least 2015.
That's why in a ZIRP environment, savers must become investors.
To earn a decent return you have had to consider investments like stocks, bonds and real estate that require a deeper knowledge and risk tolerance than savings-oriented accounts. People with little or no investment experience or knowledge have turned to the stock market to earn the return necessary to fund their lifestyle and living expenses.
That idea might be frightening to life-long savers, but it doesn't have to be. Here's a strategy for finding high-yield investments in the Fed's ZIRP world.
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Five High-Yield Stocks That Are a Safer Bet Than Treasuries
If you're trying to maximize return and minimize risk, you can't beat a high-yield stock that is a better credit risk than U.S. Treasuries.
It sounds crazy but it's true. The rate of insuring against the default of the debt of 70 large U.S. companies is lower than that to insure the debt of the U.S. government.
Meanwhile, the record-low yields on U.S. Treasuries - the 10-year note dropped below 2% recently and isn't much higher now - have put them below the yields of several major U.S. companies.
It cost about 50 basis points (bp) to insure U.S. Treasury bonds against default for five years; that translates to a cost of $50,000 annually to insure $10 million of bonds. But the cost to insure the debt of dozens of U.S. companies is less than 50 bp; for some it's as low as 30 bp.
And the United States is far from the riskiest government debt; Germany's credit default swaps were recently trading in the low 80s; Japan's and China's around 110 bp; and France's in the 150 bp range.
"There is no reason why governments should be considered better credit risks than top-quality companies," said Money Morning Global Investing Strategist Martin Hutchinson. "The Proctor & Gamble Co. (NYSE:PG) and The Coca-Cola Co. (NYSE:KO) make tangible products that people want to buy - and they do so at tightly controlled costs. So it's clear that companies like these can repay modest levels of debt under almost any circumstances.
"The same is not true for a government," Hutchinson continued. "Especially one that makes no money itself, produces few goods and services of value, and obtains money only by squeezing its unfortunate taxpayers."
Thanks to U.S. budget deficits that have grown into a massive $14.6 trillion debt, the credit default swap markets have determined that the U.S. government is no longer a risk-free investment.
Meanwhile, some companies have hit upon a magic combination of being a better credit risk than Treasuries while offering high-yield dividends and the potential for capital returns.
Here are five such companies:
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