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Collect a 7%
Yield While Taming Inflation, Deflation and Stagflation |
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By Carla Pasternak |
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The stock market has plummeted 40% from its highs and housing prices
continue to crash in a deflationary spiral ignited by the financial
crisis. As the US government injects an estimated $12.8 trillion
into the economy to fight the effects, runaway inflation looms on
the horizon. I'll show you how to defend your assets against
inflation and protect your back from deflation and stagflation at
the same time... while earning a 6%, 7% or even 12% yield.
(Full Story Below) |
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Make 7% Taming Inflation, Deflation and Stagflation
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President Harry Truman once said he wanted to hire a
one-armed economist. When asked why, he replied, so the
economist couldn't say "on the other hand."
For Barack Obama, finding a one-armed economist is even more
pressing. Obama is faced with deciding which limb of the
three-armed monster--deflation, inflation or
stagflation--could be most damaging to the nation's
well-being. Unfortunately, we income investors face the same
dilemma.
Failure to accurately decipher the coming economic storm
could be injurious to your financial health. And seldom has
the situation been so hard to read.
Deflation
Home prices have fallen an average -18% since 2008. GDP
fell -6.3% in the fourth quarter of 2008 and another -5.5%
in the first quarter of 2009. And the Consumer Price Index
(CPI) is down more than -5.5% in the last six months. That's
deflation!
If you're like most Americans, the value of your home has
fallen sharply. Your stocks are down in conjunction with the
S&P 500, which lost nearly -40% in 2008. And you are
receiving less dividend income as dividend stalwarts such as
General Electric (NYSE: GE) slashed payouts for the first
time in decades.
If deflation alone was the issue, you could protect your
portfolio by hunkering down in the most defensive bonds and
stocks. But it's not.
Inflation
To combat deflation, the U.S. government, through
stimulus spending and programs such as TARP and TALF, has by
some estimates injected $12.8 trillion dollars into the
economy. That's roughly $42,000 for every person in America.
The effect of all this spending could be massive inflation
as the dollar loses value and prices rise to offset the
effects. Massive inflation can be devastating for your
investments. Bonds you own will decline sharply in value.
The fixed income stream you receive will lose purchasing
power. Most stocks also will lose value except those that
sell commodities.
Stagflation
Finally, some economists are predicting the return of
stagflation, that unholy relic from the seventies. This
combination of slow or stagnant economic growth and high
inflation combine the worst of two worlds and can be
disastrous for your investments.
TIPS to the Rescue
Okay, that's the bad news. The good news is that you can
actually protect your portfolio from this nasty trifecta of
deflation, inflation or stagflation scenarios. Fortunately,
there's a simple four-letter solution: TIPS (Treasury
Inflation-Protected Securities).
TIPS are linked to changes in inflation as measured by the
Consumer Price Index (CPI). The principal value of the TIPS
bonds is adjusted every six months to the CPI. When the CPI
moves higher, the principal increases. The interest you
receive on the bonds is a percentage of the principal, so it
also increases. This increase, in turn, raises the bonds'
yield and provides you protection against inflation.
If deflation persists, you are still guaranteed your
principal, or the par value, of the bonds at maturity. So,
you are also protected against deflation.
Why not wait until inflation actually kicks-in to invest in
TIPS? Right now, TIPS are undervalued. The 10-year Treasury
bond is yielding 3.2% and the 10-year TIP 1.5%. That
assumes a 1.7% rate of inflation over the next decade, one
which given all the monetary stimulus appears ridiculously
low. In such an environment, the value of your TIPS or TIP
fund can rise dramatically.
You can buy and sell TIPS from your broker or directly from
the government by going to
www.TreasuryDirect.gov. The advantage of holding
individual TIPS is you get your principal when they mature.
The trade off is they are only yielding less than 2%.
For a better yield and a diverse portfolio of TIPS that
mature at different times, you may want to look at a fund.
Several funds invest in TIPS, and they generally yield in
the 5-7% range, but there are some out there as high as 12%.
Not only are times uncertain, but the possible outcomes vary
drastically in consequence to your portfolio. Fortunately,
there is a way that you can earn the returns you need while
properly minding risk. The age of TIPS has arrived and
you can still get in before the crowds.
Carla Pasternak's Dividend Opportunities
P.S.
-- Don't miss a single issue! Add our address,
Research@DividendOpportunities.com,
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here.
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Income
Notes
The
Producer Price Index, which tracks how much it costs for
manufacturers to make things, rose +1.8% last month. Analysts
had foreseen a +1.0% advance.
Higher energy prices accounted for most of the increase. June's
gasoline prices were +18.5% higher than May's. The energy
segment of the index rose +6.6%, after a +2.9% rise the month
before.
--
Brad Briggs
Research Staff
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