September Inflation Highlights Wisdom Of Preferred Stock Investors

2011 has been one of those relatively rare years where the rate of inflation has exceeded the returns provided by bank CDs. Corporate bond yields are also now being entirely eliminated by the current CPI reported this week for September.

The index now sits at an annualized value of 3.87%, up from 3.77% in August.

For 12 of the last 15 months, the CPI has headed up. Increasing commodity costs, largely due to speculators, are more to blame than surging consumer demand (understatement of the year, that). What is surprising about the new CPI value is that, in many financial press venues, the results are being reported as a win for the Fed's monetary policy.

The Fed has a stated goal of keeping the CPI at about 2%. September's number is almost twice that and rising. Also, the Fed's current monetary policy is not, according to their own statements, intended to produce short-term consumer price increases; it is intended to lower borrowing costs in order to stimulate business and, ultimately, economic growth. Not clear how we get to the Fed's Win column with a 3.87% CPI number.

In January 2011 the CPI increased above the average interest yield being paid by 24-month bank CDs in the US. While 24-month bank CD APYs have steadily fallen all the way down to an average 1.3%, the CPI has steadily risen having started 2011 at 2.67%.

Rising inflation impacts income the same way regardless of where that income comes from (bank CDs, bonds, preferred stocks, wages, whatever). In terms of your spending power, there is no escaping it.

At 3.87%, inflation is eating bank CD earnings three times over and has caught up to the 4% being offered by corporate bond yields as well.

The average 7% yield that preferred stock investors are earning on the current crop of high quality* preferred stocks is looking pretty good. Those who have chosen to add high quality preferred stocks to their portfolios are making the right choice.

The CPI will head back down again at some point, but in the meantime it is nice to know that preferred stock investors are getting it right once again. Our feet remain dry at a time when CDs are well under the inflation water level and bond holders should be reaching for the snorkel.

Not clear how this can be tallied in the Win column for the Fed but that's the word from the financial press this week. Odd.

Many Happy Returns.

* High quality preferred stocks have 'cumulative' dividends, carry investment grade ratings and are offered by companies that have a perfect track record of never having suspended a preferred stock dividend.