90% of FTSE companies yield more than the base rate. It's party time.
The headline of this article may confuse you. After all, I've previously written of how you should say no to 0.5% interest rates.
Sadly for the conspiracy advocates, the underlying message is somewhat similar. In comparison to the base rate of 0.5%, the stock market offers compelling value.
US Federal Reserve Chairman Ben Bernanke last night effectively gave the go-ahead for investors to pile back into the stock market. Bernanke told Congress US interest rates will remain at exceptionally low levels for an "extended period" in spite of the nascent economic recovery.
Celebrate Good Times
This is not necessarily unexpected, as he has consistently used similar language over the past several months.
But the markets took it as somewhat of a surprise, because they had become a little nervous when last week Bernanke raised the rate at which commercial banks can borrow emergency cash from the central bank (the discount rate) from 0.5% to 0.75%.
The market loves gift-wrapped presents like these. They celebrated in earnest, reversing most of Tuesday's losses, with US markets up around 1%.
Forget Bad Times… For Now
So much for US consumer confidence falling to its lowest level since April 2009. So much for Bernanke's sober outlook for the US economy, effectively saying he expects unemployment to remain high for a long time.
So much for Turkish shares falling 6.9% over the course of this week as relations between Turkey's army and its Prime Minister deteriorated further. And so much for yields on Greek 2-year bonds jumping from 5.4% to 5.74% in a matter of days.
Instead, confidence suddenly came flooding back to the markets. Perhaps my plea for A Thousand Richard Bransons Required had the desired effect.
Music To A Bull's Ear
Angus Campbell of Capital Spreads said on Bloomberg the low US interest rates for an extended period was "music to a bull's ear."
I wouldn't be suddenly expecting the FTSE 100 to be trading above 6,000 any time soon. A slow economic recovery means many companies will struggle to significantly lift revenues. Cost cutting can only get companies so far.
That said many of the UK's biggest companies are trading at very modest P/Es and, especially compared to the alternatives of Greek bonds, savings accounts or gilts, extremely attractive dividend yields.
I recently offered up three FTSE 100 companies trading on dividend yields of around 6%. These are big, somewhat defensive companies whose share price probably won't take off to the moon, but similarly shouldn't disappoint too much on the downside. Meanwhile, you can sit back and enjoy the yield.
91 Companies To Chose From…
But if you really want to get a little more aggressive, by my counting, 91 of FTSE 100 companies trade on a prospective dividend yield of 0.5% or more. In a world of ultra-low interest rates, the world truly can be your oyster.
There are obviously risks involved. Some companies could cut or scrap their dividends, as Royal Bank of Scotland (LSE: RBS) and British Airways (LSE: BAY) have done. And you are, of course, putting your capital at risk, especially over the short term.
Others trade on quite racy P/E ratios, like Tullow Oil (LSE: TLW) and ARM Holdings (LSE: ARM).
But in between, you've got plenty to choose from, like…
Music to a bull's ear? Just keep saying yes to 0.5% interest rates.
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