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A recent Reuters article had the headline, “Treasury May Let Investors Pay to Lend to US.” Wait a minute, what? Apparently the Treasury is “looking closely at allowing negative-yield auctions.” When I read this I literally couldn’t believe it. The really amazing thing is this isn’t the first time this has happened. In the secondary market some investors have actually accepted a negative yield to “protect their cash from financial strains.” Wow is all I can say.Let’s think about it this way. If an investor purchases a US Treasury obligation, be it a bill or bond, they normally expect some type of return. In a negative yield situation, the “investor” (and I use that word loosely) is saying I will pay the Treasury to hold onto my own money. There is never, and I mean never, any good reason an investor could have for doing this. The last time I checked, most bank accounts were covered by FDIC insurance. The FDIC is part of the federal government. This means when you put your money into a bank account (with some limitations) that your funds are federally insured against loss of principal. So with that as an option, why would you give your funds to the US Treasury and pay for the privilege?
No one should accept this deal. So what else is an investor to do? It depends on your time horizon. If you need the funds in the short term (say one year or less) then the money belongs in a liquid account with a bank or even a money market fund. If you need the funds in over one year you might do a short-term CD. If you have 3-5 years or more you could consider short-term corporate bonds or stocks.
If you are not a risk taker, some low volatility stocks might meet your requirements. I’ll give you two to look at to start your research.
P/E on ’12 earnings
Johnson & Johnson (NYSE: JNJ)
Southern Co (NYSE: SO)
Johnson & Johnson is a veritable medicine cabinet of a company that has been growing and raising their dividend for many years. Southern Co is a well respected utility, mainly in the southern U.S. that also has a long history of dividend increases. Neither company’s stock is going to take off like a rocket, but with an average growth rate of about 6% and an average yield of 3.86%, your combined expected return would be just below 10%. You might say, well look at how volatile the last few years have been. My response would be, which would you rather have:
- Southern Co, that even if you bought at the highest point in 2008 ($37.87) would have given you a return of about 4.5% a year, and that’s without dividends. If you include dividends, your return would be near double that. Also, your current effective yield would be 4.99%.
- A Treasury bond that you pay the government to hold your money.
So even if you are scared to death of stocks, or don’t want to take a chance at all, put the money in the bank. If you are willing to take a little more risk, start your research with the two companies I’ve mentioned above. Whatever you do, don’t pay Uncle Sam to hold your money.
This story was originally published by The Motley Fool.