Why Dividend Stocks Will Remain the Only Income Choice

Six years have come and gone since the Federal Reserve’s great quantitative easing (QE) experiment. I have to concede, mission accomplished. Conservative safe income has been wrung from the market. This is great news for AAA-rated borrowers; lousy news for individual savers.Dividend-Stocks
I thought the days of low interest rates would prove fleeting. When the Fed announced in late 2013 that quantitative easing would wrap up over the subsequent 12 months, interest rates would take flight. They did, but not for long.
On news of the end of QE, yields rose and bond prices fell. Through the third quarter of 2013, the yield on the influential 10-year U.S. Treasury note rose 50 basis points to 3% from 2.5%.
But as the Fed actually reduced its purchases of Treasury notes and bonds and mortgage-backed securities (MBS), rates drifted lower. Through 2014, the yield on the 10-year note drifted down to 2% from 3%. By February 2015, the yield had drifted down to 1.67%.
It wasn’t supposed to work this way.
When QE was in force – 2008 through 2014 – the Fed had purchased over $4 trillion worth of Treasury and agency bonds. It paid for these sundry securities with newly issued dollars. These new dollars, along with the Fed no longer actively holding interest rates low, would surely lead to consumer price inflation, and, thus, to higher interest rates. Reliable fixed-income would again be on the menu.
At least that was the popular supposition.
We can debate whether the Consumer Price Index (CPI) is an accurate measure of inflation, but the fact is the CPI is the benchmark measure. The CPI continues to run below 2% annually. Two percent is the Fed’s target goal. So much for popular suppositions. Muted inflation risk is one reason interest rates and long-term yields appear unlikely to take flight this year, and possibly next.
Strong bond demand is another reason . . . actually, that’s manufactured demand; much of it instigated by the Fed itself.
Though the Fed has withdrawn from QE, and thus direct support of the bond market, banks have picked up the slack. U.S. commercial banks have increased their stakes in Treasurys and federal agencies for 16 straight months, the longest stretch since 2003, according to data compiled by Bloomberg. Together, the country’s largest commercial banks hold $2.1 trillion of government debt, the most according to Fed data going back to 1973.
Part of the bank buildup of debt investments has to do with rules that require banks to hold more high-quality assets. Basel III rules and requirements approved by the Fed, Office of the Comptroller of the Currency, and FDIC, require banks to hold enough high-quality liquid assets to survive a 30-day credit seizure, in order to minimize a sudden shock to the global financial system.
Demand for Treasury securities remains high, while supply remains low. A falling fiscal deficit will result in less Treasury issuance going forward. The budget office recently announced that the deficit would fall to $468 billion this year and to $467 billion in 2016, from $483 billion in the fiscal year that ended Sept. 30.
At this point, I see no impetus for long-term interest rates to meaningfully rise. This means the low payouts on quality bank deposits and quality fixed-income investments will likely persist through 2015,  possibly deep into 2016 . . . and possibly beyond.
Income investors will need to stay out on the risk curve to capture meaningful income that compensates for risk and purchasing power lost through whatever inflation there is. This means demand for dividend stocks will remain high, because dividend stocks remain the investment that provides meaningful income to the widest swath of the population.

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