The Motley Fool

Quick Thought Of The Week: Nuts

The People’s Bank of China is doing it. The European Central Bank is doing it. The Bank of Japan is doing it. It is probably only a question of time before the US Federal Reserve will do it, too. And that time doesn’t seem too far away.

Recently, Mario Draghi, the president of the ECB, indicated that he is ready to launch another round of stimulus, if weak growth and political uncertainty fails to lift.

Draghi said indicators point to lingering softness in the economy in the coming quarters. He added that if the outlook failed to improve, then additional stimulus must be needed.

So, it looks as though a cut in the ECB interest rate to below zero looks almost inevitable.

The comments sent German Government bonds soaring. Italian Government bonds also rallied. And as bond prices climbed, yields dropped.

Currently, a whole bunch of sovereign bonds have negative yields. Put another way, buyers of those bonds are effectively paying sovereign states to lend them money. Nuts!

These include Germany where the yield on 10-year Bunds are -0.32% and Japan Government Bond that yields -0.14%. 10-year Swedish Government Bonds also sport a negative yield, as does the Netherlands 10-year bond.

Knowing how central banks like to act in concert, it is more than likely that other central banks could follow suit. No one wants to be left behind as global currencies embark on a race to the bottom.

We can sit here and argue the toss about whether the world needs another bout of Quantitative Easing. We’ve barely recovered from the last injection of monetary stimulus. But it is on its way whether we like it or not.

There was a hope, only as recently as last year, that global economies had started on the road to synchronised recovery. But the US administration has almost single-handedly put that at jeopardy by picking fights with just about everyone in the world….

….It has almost become a badge of honour to be in the crosshairs of the Trump administration.

The upshot is that dividend-hungry investors will need to go into the market in search of acceptable income again. The mad scramble for dividends could see high-yielding shares sell faster than those delicious baked sweet potatoes at Don Don Donki. But beware….

….. Not everything that glisters is gold. So, focus on how well those dividends you are expecting are covered by free cash flow and funds from operations. A sweet-looking, ultra-high yielder today could turn into a bitter, hard-to-swallow disappointment tomorrow, if we are not alert.

A version of this article first appeared in Stock Advisor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.