How to Profit from QE3 When the Fed Pulls the Trigger

In one form or another, the U.S. Federal Reserve soon will introduce a third round of quantitative easing (QE3) or a related major economic stimulus program.

A statement from the most recent Federal Open Market Committee (FOMC) meeting of the Federal Reserve reported that, "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

President of the Boston Federal Reserve, Eric Rosengren, called for an open-ended program to allow for the Federal Reserve to buy bonds like it did during Quantitative Easing 2. He pointed to the high unemployment rate as the main reason more stimulus is necessary.

"That calls for a more substantive action than we've taken to date," he said. "We need a pro-growth monetary policy," adding that the current state of the economy is "not sufficient."

Federal Reserve Chairman Ben Bernanke announced Quantitative Easing 2 at the August 2010 Jackson Hole economic policy summit. It consisted of the central bank buying $700 billion in U.S. Treasury bonds to finance the U.S. budget deficit.

Rosengren now wants the Federal Reserve to have an unlimited authority in that area, held in check only by the reaction of market forces.

Those market forces reacted very strongly to QE2, forcing the U.S. dollar down in value while prices for commodities such as oil, grains, gold and silver soared.

In addition to the commodities price rise, select stocks performed well during QE2 as consumers spent more and emerging markets enjoyed a heavy growth period. These are the companies investors should buy ahead of QE3, which is on its way.

How to Profit from QE3

The most important factor to consider when hunting for stocks to buy ahead of QE3 is a robust dividend framework.

With the Fed keeping interest rates low as it tries to repair the U.S. economy, dividend yield is crucial.

Or, as Money Morning Global Investing Strategist Martin Hutchinson put it, "In Ben Bernanke's rotten world, a few select high-yield investments are practically a necessity these days."

According to investing legend Jack Bogle, founder of the Vanguard Group of mutual funds and creator of the first mutual fund, dividend income has provided more than 40% of the historic total return of a stock.

Besides money in your pocket, dividends represent a commitment of the management to return capital to investors. Dividend income also proves that the company is sound enough to reward its shareholders without hindering the future growth prospects of the business operations.

In addition to dividends, investors should look for a company with the position to profit from a growing middle class in emerging markets.

According to a recent report by global consulting firm McKinsey & Co., consumer spending by emerging market countries will total $30 trillion by 2025, half the world's total.

Coca-Cola (NYSE: KO), McDonald's Corp. (NYSE: MCD), and Wal-Mart Stores Inc. (NYSE: WMT) are well-positioned to provide total returns from earnings around the world in a period of economic stimulus measures like those of QE2.

During QE2, Coca-Cola rose from about $25 a share to over $36. Over the same time frame, McDonald's increased from around $70 to over $90 a share, and Wal-Mart jumped from about $50 to over $60 a share.

Investors can expect similar performances during QE3.

Each of these companies has a global franchise. Coca-Cola is poured in every nation in the world except for North Korea and Cuba. At present, Wal-Mart has over 8,500 stores in 15 countries. The Golden Arches soar over the streets of about 120 different countries.

Each company also pays a solid dividend with a history of growth. The dividend yield for Wal-Mart is 2.19%. Coco-Cola's dividend bubbles over at a 2.68% rate. McDonald's offers a yield of 3.13%.

These compare to the average dividend yield for a member of the Standard & Poor's 500 Index of around 2%.

The U.S. economy is weak, Europe is in a recession, and economic growth is falling around the world. Wal-Mart, Coca Cola and McDonald's all have competitive advantages and wide economic moats that will allow each to prosper, as happened during QE2. From that, the shareholders profited from a robust total return, which included a healthy dividend yield.

To profit from QE3, stick to these winners with healthy yield.

Related Articles and News: