Federal Reserve Chairman Ben Bernanke’s speech last Friday articulated a policy that one analyst has termed “QE Forever.”
While Bernanke did not articulate a definitive program as he does not want to be accused of influencing the elections in the United States in November, he did commit the Federal Reserve, again, to maintaining low interest rates. Dr. Eric Rosengren, President of the Boston Federal Reserve, called for the Federal Reserve to create an unlimited ability to purchase US Treasury Bonds to finance the American Federal budget deficit.
While the market will clearly have something to say about that, income securities are moving higher despite fundamental supply and demand factors that should keep them lower. The low interest rate environment being maintained by Bernanke will put a premium on securities that have strong income components. That was demonstrated by the profits the Federal Reserved booked in selling the assets from the Maiden Lane III portfolio.
As a result, stocks in sectors with traditionally strong dividend yields can be expected to do well. Traders should look at executing “capture-the-dividend” transactions as a floor could be established. Stocks with big dividends and large volumes such as oil companies and utilities should be ideal for these transactions. Mortgage asset firms with double digit dividends are particularly appealing as the portfolios of these companies will increase in value as interest rates decline. That has happened with the policies of Federal Reserve Chairman Ben Bernanke, so far.
Bernanke has stated that a low interest rate environment will be maintained until at least 2014. With economic growth declining in the United States and unemployment increasing, it is likely to last longer. This provides for a very bullish future for securities that pay a strong dividend yield to shareholders. Capture-the-dividend transactions should be rewarded, particularly if done in a tax free account such as an IRA to mitigate the tax bite.