BERKO: Don’t blame Bernanke
Dear Mr. Berko:
Federal Reserve Chairman Ben Bernanke really messed up this economy, which has gone straight to Hades in a handbasket. Falling home prices, unemployment, the deficit and the failure of Freddie Mac, Fannie Mae, GM and our banks all happened under Bernanke. But because of the Fed’s low interest rates, a company like Chimera, which owns home mortgages, has a stock that pays 14.5 percent.
I’m 77 and need income, and because of Bernanke, CD rates are less than 1 percent. Just a few years ago, I was getting 5 percent on my $455,000 in CDs. This was getting me $23,000 a year, and with Social Security payments of $15,000, I was getting along fine on $38,000.
But because Bernanke has cut interest rates to zero, I’m hurting and have to take money from my CDs to pay my bills. I went to a stockbroker’s office with a friend, who bought Chimera. It sells for $3.10 a share and pays a 44-cent dividend that yields about 14.5 percent. The broker says the bonds owned by Chimera are mortgage bonds guaranteed by the government and cannot default.
I was thinking about buying 50,000 shares, each paying 44 cents, for $155,000. It would give me $22,000 in dividends, and I’d still have $300,000 of CDs remaining. I will use your suggestion of a good-till-cancel open stop-loss order to protect the price if the stock falls. The broker will charge me 3 cents a share, or $1,500, if I buy 50,000 shares.
I have read and saved your columns since 2006. So my questions to you are the following: Is this a good commission cost, and is this a good stock to buy?
N.D., Columbus, Ohio
Dear N.D.:
Before answering your questions, it’s necessary to set the record straight. Bernanke had nothing to do with the fall of the housing market, high unemployment, failing banks, etc. You’re jumping to confusion! Bernanke took over the Federal Reserve from Alan Greenspan, a bloviating mumbler who couldn’t tell a financial bubble from a Quonset hut.
When Bernanke took over in early 2006, the economy was imploding, and Greenspan (who never met a TV camera he didn’t like) was having daily laundry problems. Our teetering, easy-credit economy was running on steroid fumes from the Greenspan Fed, and Ben was charged with the Herculean task of cleaning the Augean stables that were defiled by Greenspan devotees.
In the third quarter of 2011, Bernanke surprisingly said he would keep short-term rates at current levels for two years. At that time, I suggested that Chimera Investment Corp. (CIM-$2.99) may be a reasonable buy for a five-dividend period (15 months). I then recommended selling the shares nine months prior to the anticipated rise in rates, at which time its market value and income would fall.
In January, Bernanke surprised us again, announcing he would keep rates low for three years. Now you can keep CIM for nine dividend payments (27 months) and sell them nine months prior to the anticipated rise in short rates. But what if Bernanke surprises us next month with an announcement that he’ll immediately allow short-term rates to rise? You’ll be gobsmacked so hard that your tutu will be in a tizzy, and a good-till-cancel open stop-loss order may not protect enough of your principal.
Meanwhile, I wish the weekly passage of a 7-millimeter kidney stone on the broker who recommended that CIM transaction plus a $1,500 commission to do it. That’s turnpike thievery. You can buy those 50,000 shares from a discount broker for less than $10.
Next, you would have to be dumber than a bag of hammers to invest that much money in CIM, whose dividends have declined for three consecutive years. Here’s a better solution: Diversify and invest $10,000 in each of the six following mortgage real estate investment trusts, which yield between 14 and 19 percent: Annaly Capital Management Inc. (NLY-$16.61), American Capital Agency Corp. (AGNC-$30.63), Capstead Mortgage Corp. (CMO-$13.37), Chimera Investment Corp. (CIM-$2.99), Invesco Mortgage Capital Inc. (IVR-$16.74) and Hatteras Financial Corp. (HTS-$28.29). The combined dividend income on these is about $9,000.
Then invest $150,000 in 10 dividend growth issues (including pipeline stocks), yielding an average of 5 percent; they’ll earn at least $7,000. Next, invest $70,000 in a half-dozen preferred and convertible bonds yielding between 8 percent and 12 percent that I’ve discussed in earlier columns — they should net about $6,000 in income. If you place the remaining $175,000 in a credit union money market fund paying 1 percent, you’ll have a combined annual income investment of $22,000.
This makes a lot more sense than putting 155,000 eggs in one sector — or in one handbasket.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2012 Creators.com
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