Spend, Consumer, Spend: Why the Government Doesn't Want You to Have Cash

Marc Lichtenfeld
by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

I’m not a conspiracy theorist.

I don’t believe the U.S. government allowed 9/11 to happen. I do believe American astronauts landed on the moon. And President Obama was born in the United States.

That being said, it’s very clear that the U.S. government does not want you to hang on to your cash.

Remember one of the first things President Bush said after the 9/11 attacks? Keep your faith in the American economy. In other words, spend your money (he never actually said “go shopping”).

Consumer spending makes up roughly 70% of the economy, so despite both parties repeating pabulum about engaging in fiscal responsibility, the government always wants you to spend, spend, spend.

That’s because of the multiplier effect. If you spend money, the business that receives it may go out and buy supplies, expand, or hire new employees. The supplier now has more dollars to do the same, and so on and so on. And of course, tax revenue is created every step of the way. You pay sales tax on an item, the business pays a corporate tax, a newly hired employee pays income tax…

But some people are just darn stubborn and won’t spend. They insist on saving. Well, the government is going to make sure that that money isn’t squirreled away in some bank. By keeping interest rates at record lows and with another round of quantitative easing all but guaranteeing those rates will stay low for a while longer, Uncle Sam is making sure you put that money to work somewhere.

You can’t afford to keep it in the bank. The average interest rate on a money market account is 0.49%. If you want a little extra yield, you can lock up your money for one year in a CD for a whopping 1% if you’re very lucky. Or maybe as much as 1.3% for a three-year CD.

Unless you have so much money that you can lose buying power every year and still be set for life, 1.3% isn’t going to cut it.

By keeping interest rates so low, the government achieves several things:

It encourages businesses and homeowners to borrow money, which helps propel the economy. Or, it forces individuals to either invest their money in the public markets or take a risk by funding a business.

If it’s the latter, again, that obviously helps generate economic activity, especially if the business hires some employees.

But I’m going to concentrate on the investment part. If investors have nowhere else to put their money, they’ll often invest in the bond market, which will keep interest rates low (as bond prices go up, interest rates go down). Thus accomplishing the government’s goals. Finally, the rest of investors will buy stocks.

If more money is finding its way into stocks, then, theoretically, the market should rise, which is good for 401(k)s, sentiment, etc…

Don’t Fight the Fed

There’s an expression, “Don’t fight the Fed.” That means when the federal government is lowering interest rates, you should buy stocks and bonds. It’s difficult to make money going in the opposite direction of such a powerful force as the U.S. government. When the Fed is raising rates, you typically want to be a seller of those assets.

So with the Fed pledging to keep interest rates low for the foreseeable future, it’s as if they’re telling you that they don’t want you to put that money in the bank at 0.49%, but would rather have you spend it, start a business, or invest.

If you’re going to invest in stocks, look for Perpetual Dividend Raisers. These are stocks that raise their dividends every year. First of all, you’ll get several times the amount of income as you’ll get putting the money in the bank or a CD. You can find many high-quality stocks with 3.5% to 4% dividend yields. Furthermore, as these companies increase their dividends each year, you’ll stay ahead of inflation, even when the Fed starts to raise rates.

That’s key, as you’ll want your income investments to outpace inflation every year, otherwise you’re losing buying power.

Look at stocks like Intel (Nasdaq: INTC), which sports a 3.7% yield and is the leading chip maker in the world. Suffering through a slight slump right now, it’s an opportunity to get in on one of the world’s dominant brands at a ridiculously low 10 times earnings.

The company has been raising its dividend by an average of 14% per year over the past five years. It kind of reminds me of a Coca-Cola (NYSE: KO), where you know that regardless of the ups and downs of the economy, Intel is going to be there in 10 years, generating great long-term returns for shareholders. With that yield and growing dividend, it almost can’t help but be a long-term winner.

I usually don’t agree that you should blindly do whatever the government tells you. But in the case of investing, when the government is telling us to put money to work – buying a home, starting a business, or investing, it’s foolish to ignore what the Feds are saying…

Good Investing,

Marc

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A Great Perpetual Dividend Raiser

If you’ve been following us over the past few months, you already have a deep understanding of what Marc means by Perpetual Dividend Raisers…

For those who aren’t very familiar, you’ll want to check out Marc’s bestselling book, Get Rich with Dividends.

And there’s a litany of stocks that fit the bill for Marc’s strategy, but he wanted to share one in particular with readers in today’s issue – Aqua America (NYSE: WTR).

It’s a stock that’s gained about 13% since we first mentioned it to Plus readers back in late March – not including its dividend, which is currently yielding 2.6%.

Here’s what Marc recently told his fellow Oxford Club members about WTR:

“Two and a half years ago, my predecessor, Louis Basenese, recommended Aqua America (NYSE: WTR) in The Perpetual Income Portfolio. Hopefully, you were a reader back then, because Lou nailed this one. The stock has returned 63% since then.

“But if you’re brand new to the story, no worries. Aqua America is poised to deliver growth and income for many years.

“Aqua America is a water utility that serves roughly three million people in 10 states.

“In the second quarter, revenue and earnings grew 11%, while expenses remained flat…

“Since 1999, net income has grown at a compounded rate of 12.1%.

“And as a dividend payer, it has really performed. Aqua America has raised its dividend 22 times in the past 21 years, making it a Perpetual Dividend Raiser. It announced that its next dividend payment in December will increase 6.1%, giving the stock a yield of 2.8%.

“Over the past 10 years, Aqua America has grown its dividend by an average of 7.6% per year, more than enough to keep up with inflation and put a little extra in your pocket.

“The company has a stated goal of paying out 65% of net income in dividends. Next year, the company is projected to earn $1.19 per share, which would translate to about $0.77 per share in dividends, a 10% increase. In 2014 and 2015, earnings estimates are $1.27 and $1.32, suggesting dividends of $0.82 and $0.86, respectively.

“Growth shouldn’t be a problem for Aqua America. Besides serving more customers due to acquisitions and rate increases, the company is taking advantage of the natural gas drilling boom…

“In a joint partnership with PVR Partners (NYSE: PVR), the two companies are building pipelines to deliver fresh water to drilling sites in the Marcellus Shale region. This will take thousands of trucks, which are currently needed to transport water, off the road. The pipeline will decrease traffic from all of those trucks, as well as pollution and expenses.

“The first of the three pipeline projects is already finished, and generating profits for Aqua America. The second and third pipeline operations should be fully operational by 2014. As a result, the company is actively looking for other opportunities in the gas drilling industry.”

So not only do you get a solid dividend raising stock, but WTR is also a play on the growing water demand and the rise of shale drilling in the United States. It’s also one of the few companies that offers a slight discount on stock purchases through their DRIP program. For more information on that, click here.

– Justin Dove with Marc Lichtenfeld

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