Daily Gains Letter

Why Chasing Income Stocks Is No Longer a Smart Move

By for Daily Gains Letter |

Federal ReserveAmerica’s favorite sugar daddy, Federal Reserve chairman Ben Bernanke, has once again come to Wall Street’s rescue. The U.S. Federal Reserve said that while the economy continues to recover, it is still in need of support. As a result, it will continue its $85.0 billion-per-month bond-buying program unabated. (Source: “Federal Reserve Issues FOMC Statement,” Board of Governors of the Federal Reserve System web site, July 31, 2013.)

Before the markets opened Wednesday, the Bureau of Economic Analysis reported that second-quarter U.S. gross domestic product (GDP) expanded at a faster-than-expected pace of 1.7%; that’s up from a revised 1.1% in the first quarter. (Source: “National Income and Product Accounts Gross Domestic Product, second quarter 2013 (advance estimate),” Bureau of Economic Analysis web site, July 31, 2013.)

Despite the better-than-expected results, the Federal Reserve said that the U.S. economy expanded at a modest pace during the first six months of the year, and that the overall economic picture remains lackluster.

To help quell nervous investors, the Federal Reserve also revised the unemployment rate at which it would consider raising interest rates to six percent; previously, the Federal Reserve had said it would raise interest rates once the jobless rate hit 6.5%. Needless to say, with unemployment sitting at 7.6%, the U.S. economy has a long way to go.

Lower long-term interest rates are supposed to encourage consumers and businesses to take out loans for homes, new equipment, etc. At the same time, banks have been reluctant to lend to those who need it the most, which is reflected on Wall Street. Thanks to the Federal Reserve’s $85.0-billion-per-month quantitative easing policy, the S&P 500 is roaring along in uncharted territory. For the average American, unemployment and personal debt remains high and wages are stagnant.

Wednesday’s announcement by the Federal Reserve shouldn’t be a total surprise: back on May 22, the Federal Reserve hinted it might start to scale back its quantitative easing polices, halting the bull market in its tracks. Over the ensuing weeks, ongoing uncertainty sent Wall Street on a roller coaster ride. This time around, the Federal Reserve is looking for tranquility, promising to keep the easy money flowing and Wall Street chugging along.

Wall Street may be cheering the ongoing stimulus package, but Main Street probably isn’t. That’s because shoring up an improving-but-still-weak U.S. economy means long-term interest rates are being kept artificially low.

And that’s bad news for income-starved investors who have seen their retirement portfolio hammered since the first round of quantitative easing was introduced in late 2008. The way things are looking, it could be at least two years before investors see any material increases in bond yields and interest rates.

One of the best ways to get a handle on this economy is to understand your investment objectives. For investors, this could mean re-evaluating your investment objectives and risk tolerance.

It’s also a great time for investors to take a second look at their retirement portfolio, and readjust it to reflect the current near-record-low interest rate environment. This includes scrutinizing the risks in their bond portfolio.

It might also be prudent for investors wanting to diversify their investment portfolio to consider those stocks that provide both capital appreciation and income. But don’t chase income stocks just for the sake of replacing lost income; no matter what you hear; even in a Federal Reserve-inspired bull market, there are no safe havens.

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