After Fed Decision, It’s Time to Turn to Income Stocks

Income stocks have never looked better than after yesterday’s Fed bombshell.

The Federal Reserve announced on Wednesday that it plans to keep short-term interest rates near zero through 2014 in an effort to spur spending and growth in America’s slow-moving economy.

The announcement merely extended what the Fed had previously stated: that interest rates would stay near zero until mid-2013. But it wasn’t good news for income investors.

Our own Ian Wyatt weighed in on the announcement.

“Ben Bernanke and the Federal Reserve are unfortunately hell-bent on keeping interest rates at zero in hopes of jumpstarting the sluggish U.S. economy,” Ian said. “This reckless policy penalizes investors who have worked hard, saved money, and rightfully deserve a healthy investment income in retirement.”

Indeed, diligent money savers and retirees are the ones who suffer most from the zero interest rate policy of the Federal Reserve. The conventional route of watching your coin multiply through CDs, money market accounts and Treasury bills no longer applies. For the next three years at least, those people are all but forced to put their money into other, more risky areas if they want to achieve any yields.

These days, dividend stocks are the way to go. Dividend payers have long been a safe haven – stocks with low volatility that offer quarterly payments regardless of how poor the stock is performing. But now many of them offer higher yields and healthy returns.

As I wrote earlier this month, dividend payers were the best performing stocks on the market last year. Stocks listed on the S&P 500 that paid dividends in 2011 produced an average return of 1.5%, while stocks that didn’t offer dividends declined 7.5%. Better yet, most of those dividend payers offer yields that are more lucrative than the U.S. Treasury.

Ten-year U.S. Treasury bonds currently yield 1.95%. Telecommunications stocks (5.9% yield), utilities stocks (4.1%) and health care stocks (3.7%) that pay dividends all boasted yields that were at least double 10-year Treasury bonds in 2011. Look for that trend to continue this year as more and more investors flock to dividend-paying stocks.

Interest rates are going to be nonexistent for another three years while the Fed waits for the dark financial clouds to pass. High-paying dividend stocks are a smart place for investors to put their money until the storm passes.