Why the Fed Put These Stocks Ahead of Savers

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Here's a short description of what's happened so far this week, put in language a first-grader could understand:

When the U.S. had its debt downgraded, the Treasury Department was mad at S&P. Yet while the Treasury couldn't really fight back itself, the big bad Federal Reserve decided to stick up for its monetary cousin and sent the bully rating agency running home to Momma.

OK, so maybe a first-grader wouldn't get the debt downgrade part. But there definitely is a fight going on, and it's one that policymakers desperately need to win at any cost.

The Fed's move may not have been a vote of confidence in the economy, but it certainly helped boost stock prices. Still, every move has winners and losers -- not to mention unintended consequences -- and in this case, it's those who rely on low-risk savings vehicles who'll pay the price.

Those pesky savers
For retirees and other conservative investors, having money in liquid savings accounts isn't a luxury -- it's a necessity. You simply can't afford to have all your money tied up in risky investments like stocks when you know you've got bills to pay later this month.

But when the Fed promises to keep interest rates low, as it did yesterday, it hurts retirees by sapping their income. Instead of being able to live off their interest income, as they did when short-term rates were closer to 5%, retirees have to tap slowly but steadily into their principal, increasing their chances of ending up penniless.

That, however, isn't what the Fed is most concerned with. Throughout the extended financial crisis of the past several years, the Fed and the Federal government have demonstrated a concerted effort to make saving as unattractive as possible.

The reason is simple: Savings thwarts the general mission of jumpstarting economic activity. When the Fed boosts money supply and the Treasury does things like handing out temporary tax cuts, the last thing they want is for that money to go straight into a bank -- and then have that bank deposit it right back at the Fed's doorstep rather than lending it out.

Betting on the borrowers
No, it's a borrower's world right now, and investing with that in mind could make you rich. Consider these winners from the latest battle in the ongoing interest rate tug-of-war:

  • Highly leveraged companies got a big boost from the Fed's promise to keep short-term rates low. For instance, mortgage REITs American Capital Agency (NAS: AGNC) and Cypress Sharpridge (NYS: CYS) jumped sharply after the Fed announcement yesterday, as it appears their source of cheap financing will last at least until 2013.
  • Beaten-down banksCitigroup (NYS: C) and Wells Fargo (NYS: WFC) also gained back some of their losses after the Fed move. By helping banks keep rates on savings low, the Fed paves the way to let them keep their interest income levels higher -- potentially averting a capital crisis down the road.
  • Capital-intensive industries depend on access to borrowing, so the cut is good news for them. For instance, Brigus Gold (ASE: BRD) and Northgate Minerals (ASE: NXG) both have key projects in development or coming on line, and they'll need money to get them going. The Fed's move goes a long way toward ensuring that they'll get it.

In addition, the move will inevitably boost dividend stocks of all kinds. Whether it's safe or not, retirees simply have no good income-producing alternative right now. So expect not just individual dividend stocks but also dividend-oriented ETFs like Vanguard High-Yield (NYS: VYM) to thrive.

Don't take it personally
Retirees may feel like the Fed hates them, but it's just business. With the government on a mission to restore growth, savers are a lower priority. Rather than letting the Fed walk all over you, you can take steps to profit from those anti-saving moves.

Learn more about how dividend stocks can help your portfolio by reading this free special report from The Motley Fool. Inside, you'll find 13 names, along with analysis to tell you why we think they might fit well in your portfolio.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.



At the time this article was published Fool contributorDan Caplingeris tired of seeing savers get shafted. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool'sdisclosure policynever leaves you out.

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