Submitted by William Briat as part of our contributors program.
Top-Yielding Stocks to Combat Low Interest Rates
Federal Reserve Chair Janet Yellen has confirmed what most already knew. The recovery in the U.S. jobs market is far from complete. Yellen noted that the unemployment rate has improved since the Federal Reserve initiated its last round of quantitative easing in late 2012, falling from 8.1% to 6.6%. Curiously, in 2013, the U.S. economy grew just two percent.
That said, against the backdrop of a so-called improving U.S. economy, the numbers of the long-term unemployed and part-time workers are far too high. In fact, 3.6 million Americans, or 35.8% of the country’s unemployed, fall under the “long-term unemployed” umbrella—that is, those who have been out of work for more than 27 weeks. The underemployment rate (which includes those who have part-time jobs but want full-time jobs and those who have given up looking for work) remains stubbornly high at 12.7%.
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The improving unemployment numbers come on the heels of two straight months of weak jobs numbers. In January, economists were expecting the U.S. to add 180,000 new jobs to the U.S. economy; instead, just 113,000 new jobs were added. In December, economists were projecting 200,000 new jobs would be added—instead, the number was an anemic 74,000.
For the head of the Federal Reserve, this translates into more money being dumped into the bond market ($65.0 billion per month) and a continuation of artificially low interest rates.
Once again, bad news for Main Street is good news for Wall Street. After Yellen’s speech, the S&P 500, NYSE, and NASDAQ responded by surging higher. Again, the Federal Reserve’s ongoing bond buying program and open-ended artificially low interest rate environment is great for borrowers and homebuyers, but it’s terrible news for income-starved investors.
With interest rates near zero, short-term bonds, certificates of deposit (CDs), and other traditional income-generating investment sources are paying investors next to nothing. Case in point: 10-year government bonds currently provide an annual yield of 2.6% and 30-year Treasuries yield 3.6%.
Those kinds of returns will do nothing for investors looking to build up a retirement portfolio that’s been left devastated by low interest rates. And unfortunately, after more than five years, many Americans have resigned themselves to living in a world of low interest rates.
It’s not a total surprise to see why some investors are becoming increasingly drawn to high-dividend-yielding stocks and exchange-traded funds (ETFs). Despite there being a number of ETFs that use the word “high dividend,” none of them really are.
When you hear “high dividend,” you might think you’re looking at something offering an annual yield of five percent or more. Vanguard High Dividend Yield Index ETF (NYSEArca/VYM) provides an annual dividend of 2.92%. The iShares Select Dividend (NYSEArca/DVY) ETF is a bit better at 3.14%—but that’s not going to entice income-starved investors.
While individual high-dividend-yielding stocks do not provide the same kind of exposure or diversification as “high-dividend-yielding” ETFs do, they will provide a better annual dividend yield.
Mercury General Corporation (NYSE/MCY) is a high-dividend-yielding stock that has seen its share price slip more than 13% since the beginning of the year and is currently trading at a support level near $43.00. The company has provided a dividend for 27 consecutive years and offers an annual dividend of 5.2%. PPL Corporation (NYSE/PPL) is another high-dividend-yielding stock that has provided a dividend for 12 consecutive years and offers an annual yield of 4.9%.
Now, granted, you don’t want to chase a stock just because it offers a high dividend, but it doesn’t hurt to add a few financially solid stocks with higher yields to your retirement portfolio. And with the markets see-sawing right now, a lot of solid companies are providing higher yields.