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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.
There are better options than zero
LOOKING to gauge the panic level of American investors? Search no further than Tuesday’s sale of $32 billion worth of four-week U.S. Treasury bills.
Investors gobbled up these ultra-safe assets. The yield on the bills? Zero percent.
That’s right, investors willingly gave the federal government $32 billion Tuesday and demanded no interest. All they wanted was the assurance that they would get their principal back in four weeks.
Super-investor Warren Buffett found humor in this panic, according to a blog post this week by Fortune magazine editor at large Patricia Sellers. Buffett e-mailed this note to the directors of his company, Berkshire Hathaway:
"This should be bullish for Berkshire. With great foresight, I long ago entered the mattress business in a big way through our furniture operation. Now mattresses have become fully competitive as a place to put your money, and sales will soon take off."
Of course not everyone (or anyone else, for that matter) has the ability to calmly watch the hysteria while sitting on a pile of tens of billions of dollars to invest.
Some people simply need the assurance that their principal will still be there at the start of 2009. Perhaps they’re depending on that money to make a down payment on a house or fund their children’s college education.
The Federal Deposit Insurance Corp. guarantees up to $250,000 in people’s bank deposits, but some people have more money than that to protect.
As is commonly said, the stock market is a terrible place to invest money that is needed in the short term. You therefore can’t fault people who park their dough for the short term in Treasuries.
But for those people who have money to invest, few significant planned short-term expenses and a desire to build long-term wealth, surely there are better opportunities amid the hysteria than zero-percent U.S. Treasury bills.
One of the easiest ways to dip your toes into the stock market is to find a low-cost index or mutual fund and put in an amount you can afford each month. That’s called dollar-cost averaging and is a way to avoid a purchase in bulk when the market is high. It’s the way people invest in 401(k) plans.
Buffett has said often that a low-cost index fund is the best buy for the "know-nothing" investor. That gives you every stock in some index–say the Standard & Poor’s 500.
Other investors enjoy the challenge of buying individual stocks. For these folks, now seems like a good time to focus on cash-rich companies that pay a reliable dividend. Many solid companies are now paying yields that are two or three times what you can get on government bonds or money market accounts.
One good place to look for these companies is the Standard & Poor’s 500 "Dividend Aristocrats" list, which comprises large U.S. companies with a long history of raising their dividend payments.
Investors with an especially long-term horizon can reinvest the dividends in more shares of these companies, many of which now have depressed stock prices. Many companies do this automatically through dividend reinvestment plans.
One thing to be cautious about, however: Companies can at any time reduce or suspend their dividend payments if times get tough. So it’s probably best to find companies that offer high but not-too-high payments, and that have the cash to make the payments.