Could interest rates soon be a thing of the past? It sure looks that way.
A bank in Denmark recently announced it will offer the world’s first mortgage loan with a negative interest rate. In other words, the bank will pay you to borrow its money!
Jyske Bank, which is the third-largest bank in Denmark, said it will offer a rate of -0.5% for 10-year mortgages.
They’re not alone. Nordea, another Danish bank, said it will offer 30-year mortgages with an interest rate of 0.0%.
Of course, there’s the fine print. Technically, Jyske said they won’t send borrowers a check each month. Instead, they’ll reduce the amount outstanding each month.
Still, this is a big development and it has to be seen as part of a broader trend of interest rates falling all over the developed world.
UBS, the famous Swiss bank, told its wealthy clients that it will start pinging their accounts 0.6% per year if their deposits fall below 500,000 euros. In Germany, the entire yield curve is negative.
Right here in America, the Federal Reserve recently cut rates, and it looks like they’ll do it again. In fact, it looks like they’ll do a few more times. The futures market, where investors can bet on Fed policy, traders expect a rate cut next month, another in October and a third in December.
In a world of crashing interest rates, what’s an investor to do? You don’t want to have some wealthy financial institution take your money for the privilege of renting it out to others. The good news is that there are some conservative, blue-chip stocks that that still offer generous dividend yields. Right now, there are 143 stocks in the S&P 500 that pay a dividend yield of more than 3%. About half of those yield more than 4%.
Check out International Business Machines (IBM). Big Blue currently pays out a quarterly dividend of $1.62 per share. That works out to $6.48 on the year which comes to an annualized yield of 4.91%. That’s a nice chunk of change.
Of course, IBM is a stock not a savings account so it does offer some risks. But think of it this way, an investment in IBM is offering you the equivalent of more than 1,200 Dow points, just to buy the shares. Any capital appreciation is extra.
Nor is IBM about to cut the dividend. That’s something investors to watch out for. Sometimes stocks sport high dividends not because they’re a value but because the dividend is about to be cut. The share price reflects the expected dividends, not the past ones.
IBM last increased its dividend just a few months ago. Also, the tech giant can easily cover its dividend commitment. At the current rate, IBM is paying out about half of its profits to shareholders. In fact, IBM can afford to hike its dividend for years to come. IBM has increased its dividend every year for the last 24 years in a row.
I should note that IBM’s recent earnings report came in 10 cents better than expectations. For Q2, Big Blue earned $3.17 per share while the consensus on Wall Street had been for just $3.07 per share.
Some of IBM’s business has been weak and that’s probably been what’s weighing on the stock. Revenues at IBM have been falling for a few quarters. The important news is that the company is taking action to change things. IBM is exiting lower-margin businesses.
IBM also recently closed on its largest ever acquisition. The company bought Red Hat for $34 billion. IBM’s goal is to become the world’s largest hybrid cloud platform provider. For 2019, ISM expects earnings of $13.90 per share and free cash flow of $12 billion.
The free cash flow number is important. That’s especially true today with so many flimsy companies going public. This week, WeWork unveiled its S-1 filing. This is the official form companies need to file before they go public.
Wall Street has had a field day laughing at their over-top-top pretentiousness. In the filing, WeWork actually says, “Our mission is to elevate the world’s consciousness.”
Oh dear lord. It sounds like the Fyre Festival meets Wall Street. I mean, this is a workspace rental company!
For the first six months of this year, WeWork lost $900 million. If that’s raising the world’s consciousness, well…then I’m fine with IBM’s 5% yield and $1 billion a month in free cash flow.