Wednesday, March 5, 2008

* MMA Rates are Falling, What are You Going to Do?

Let me state the obvious: Since year-end, money market rates have been in a free fall. At the end of the year my best money market account (MMA) was earning 5.11% APY. That same account still has my highest rate, but it is now earning a measly 3.75%. So what's a guy to do? Here are a couple of actions that I have taken:

  1. I put a floor on my comparative money market rate used to evaluate dividend stocks. As described in my "Updating the MMA Rate" post, the correct rate to use would be the effective rate over the next 20 years. I think using the current rate as a proxy for the next 20 years is fraught with errors. In periods of high rates, certain investments would be precluded due to the above average rate; while in periods of low rates, as we are in now, undeserving companies would potentially qualify as a buy.
  2. I have accelerated the pace of moving funds from my money market account to my stock investments. When my yield on cost (YOC) was less than 5% and my insured MMA was earning 5.11%, I was not necessarily in a hurry to move my funds out of the MMA into equities. Stock prices of good companies continue to fall, which in turn raises their yield. As reported in "Progress Update - Feb. 2008", my February 2008 YOC was 5.13% which is strong when compared to the 3.75% MMA rate. My employer pays bonuses in March. I usually put it in my MMA and use it, along with the interest it earns, over the following year to purchase equities. In addition, a portion of my base pay also goes into the MMA to fund equity purchases. Prior to the above acceleration, my purchase rate had dropped to a level where I was only seeing a slight monthly decrease in my MMA account.
It is great to be a dividend investor in the current environment!

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