I Bonds are a Deal
I last wrote about US Government I Bonds in January 2022. Interest rates were 7.12% at that time through April 2022. Interest rates are even higher now, and I Bonds yield 9.62% because of high inflation. This rate is good for I Bonds issued between May 2022 and October 2022. I Bonds are a deal with a 9%+ yield. Where else can investors and savers get a guaranteed rate of return that high in a low-risk, short-term investment.
However, savers should remember I Bonds are meant as a long-term investment and not a short-term savings vehicle, although many people use them for other purposes.
How Much Can You Buy?
Assuming a saver has not yet bought I-Bonds, they can electronically buy $10,000 in I Bonds. Hence, a person can save $10,000 in a year and lock in a 9.62% yield through October 2022. A married couple can save $20,000 because the limit is $10,000 per Social Security Number per year.
Ambitious savers can do even better. For example, tax refunds can be used to save up to $5,000 in I Bonds, making it possible to save $15,000 for a single tax filer, $25,000 for a married couple filing jointly, and $30,000 for a married couple filing separately.
What is the Interest Rate?
The annual composite rate is currently 9.62% for I Bonds if the fixed rate was 0%.
Example of I Bond Composite Rate
The most recent rate announcement was on May 2, 2022.
Composite Rate for I Bonds issued from April 2022 through October 2022
|Semi-Annual Inflation Rate||4.81%|
|Composite Rate Calculation||[0.00% + (2 x 4.81%) + (0.00% x 4.81%)]|
The composite rate is higher for I Bonds bought with higher fixed rates. For instance, I Bonds bought between September 1998 and April 2001 yield more than 13%.
Risks of I Bonds
Despite the deal offered by I Bonds, they do have some risk, albeit low risk, because the US Government guarantees them. Savers get their principal back plus interest. Theoretically, the US Government may not pay the principal or interest, but this has never happened.
The primary risk is that part of the composite rate is variable and may reset lower if inflation decreases, although it may reset higher if inflation increases. Unfortunately, the fixed rate is still 0%.
I Bonds must be held a minimum of one year before redemption. If they are redeemed between one and five years, savers must pay a 3-month interest penalty. After five years, no penalty is applied.
Another risk is that I Bonds may earn low or zero percent interest if the fixed rate is 0% and inflation is low, setting the variable rate at a low value.
Lastly, I Bonds must be tracked manually. The US Government does not send monthly, quarterly, or annual statements. As a result, owners and heirs can easily lose track of their I Bonds. Consequently, they should consider including I Bonds in their estate planning.
Final Thought on I Bonds Are a Deal
I Bonds are increasingly popular because of their inflation protection feature. They are now offering higher yields than CDs, savings accounts, REITs, utility stocks, and MLPs. There is little risk in owning I Bonds, especially if inflation stays high and the stock market remains volatile.
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The Stock of the Week
Today we highlight Lancaster Colony (LANC), a small consumer staples company. Lancaster Colony makes food products under the New York BRAND Bakery, Girard’s, Sister Schubert, Marzetti, Cardini’s, and Chatham Village labels. Lancaster Colony missed earnings estimates by a wide margin because of high inflation for input materials, labor, packaging, and freight. The company raised prices, but the effect is lagging. According to Stock Rover*, the stock price was down nearly (-37.3%) in the trailing 1-year. Lancaster Colony is a Dividend King with 60 years of increases. The forward dividend yield is about 2.67%, the highest in the past decade and more than double the 5-year average. The stock price is below the 50-day and 200-day exponential moving average (EMA). The forward P/E ratio is about 27.1X, below the range in the past 5-years.
Dividend Increases and Reinstatements
Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.
Dividend Cuts and Suspensions List
The dividend cuts and suspensions list was most recently updated at the end of May 2022. As a result, the number of companies on the list has risen to 557. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.
Six new additions indicate companies are experiencing solid profits and cash flow in May.
The new additions were CVR Partners, LP (UAN), Oasis Petroleum (OAS), Eagle Bulk Shipping (EGLE), United Guardian (UG), Golden Ocean (GOGL), and Ellington Residential Mortgage REIT (EARN).
Dow Jones Industrial Averages (DJIA): 32,899 (-0.95%)
NASDAQ: 12,013 (-0.98%)
S&P 500: 4,108 (-1.20%)
The S&P 500 is trading at a price-to-earnings ratio of 20.76X, and the Schiller P/E Ratio is about 32.13X. These multiples are based on trailing twelve months (TTM) earnings.
Note that the long-term means of these two ratios are 16.0X and 16.9X, respectively.
The market is still overvalued despite the recent market correction and rebound. Earnings multiples more than 30X are overvalued based on historical data.
S&P 500 PE Ratio History
Shiller PE Ratio History
Stock Market Volatility – CBOE VIX
This past week, the CBOE VIX measuring volatility was down about 1.0 points to 24.79. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.
The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.
Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.
The Conference Board’s Consumer Confidence Index declined slightly in May to 106.4 and followed an upwardly revised 108.6 value for April. In addition, the Present Situation Index, based on consumers’ sentiment toward current business conditions and the labor market, decreased to 149.6 from a revised 152.9 in April. “The decline in the Present Situation Index was driven solely by a perceived softening in labor market conditions. By contrast, views of current business conditions—which tend to move ahead of job trends—improved,” The expectations index, based on consumers’ six-month outlook for income, business, and labor market conditions dropped to 77.5 in May from 79.0 the previous month.
The US Bureau of Labor Statistics Job Openings and Labor Turnover Survey, or JOLTS, reported 11.4 million job openings as of the last day of April, 455K less than the upwardly revised record of 11.855M in March. Openings continue to outpace hires, with employers hiring 6.6M people in April. The hires rate was little changed at 4.4%. Industries contributing to the decrease include healthcare and social assistance (-266K), retail trade (-162K), and accommodations and food services (-113K). Offsetting the decrease were increases in transportation, warehousing, and utilities (+97K), nondurable goods manufacturing (+67K), and durable goods manufacturing (+53K).
The US Bureau of Labor Statistics reported that 390,000 jobs were added in May, as the unemployment rate stayed at 3.6%. February 2020’s pre-pandemic reading was 3.5%, with 5.7M unemployed. April’s payrolls were revised (+8K) to 436K. The May increase in payrolls was broad, with the most significant gains concentrated in leisure and hospitality (+84K) and professional and business services (+75K). There were also gains in transportation and warehousing (+47K), construction (+36K), and manufacturing (+17K). Retail trade payrolls declined (-6.1K) but are still 159K above pre-pandemic levels.
Thanks for reading I Bonds Are a Deal – Week in Review!
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