Federal Reserve Gives Wall Street A Lift

The stock market was holding onto rather meager gains Tuesday afternoon, after Monday's 630 point drop in the Dow, when the Federal Reserve Board ended its meeting and issued an eagerly awaited statement on the economy.

At first, stocks began to sell off as traders tried to parse the meaning of the central bank's words. Suddenly, buying began in a frenzy that sent the Dow Jones Industrials rocketing up 430 points by the close.

Why the abrupt reversal, and what exactly does it mean for consumers? In essence, the Fed said it would keep interest rates low until at least 2013. By doing so, it signaled to Wall Street that bonds will not be a very good place to park money for the next couple of years.

If bonds are producing little in the way of returns, then stocks – especially those that pay a dividend - suddenly looked like a better place to put money. And a day after investors had pounded most stocks to a bloody pulp in reaction to a slowing economy, there were lots of bargains to be had. Thus, the buying frenzy.

Not out of the woods yet

While almost no one thinks the stock market will suddenly return to normal, as though Monday never happened, the outlook for stocks looks a good bit better today than it did yesterday. And the Fed displayed some creativity.

Before Tuesday, it was said that the Fed “was out of bullets” to help the economy. It had done everything in the way of stimulus that it could do. But by putting a time line on its low interest rate policy, something it had never done before, it showed that it actually had another ace up its sleeve.

How can small investors take advantage? Seek advice from your broker or financial advisor about stocks that pay dividends. Dividends are profits returned to shareholders on a regular basis, usually quarterly. A dividend is a set amount per share. The dividend, divided by the share price, gives you the annual percentage rate, or yield, of your investment.

 For example, a stock that is selling for $32 a share and pays a dividend of $1.60 has a yield of five percent. Dividends are subject to change, but solid, blue chip companies rarely change it. Still, dividend stocks should be chosen with care.