Dividend Stocks That Win With Higher Interest Rates

Utilities and Consumer Staples flourished in the low rate environment over the last few years, even managing to outperform almost every other sector in 2011. Now, as rates increase, investors are stampeding out of the two sectors and looking for dividend-payers that can prosper in the new environment of higher credit costs. Look for companies with high underfunded pension obligations and low payout ratios to surprise on the upside when it comes to returning shareholder cash.

There is one group of stocks that could come out much stronger in a rising rate environment, those with large underfunded pension obligations. Companies estimate their future pension obligations using a discount rate, set off of prevailing interest rates, to arrive at a present value liability. A lower rate means that the present value of these liabilities is larger and the company must set aside more money to fund their plan. Besides high, underfunded pension obligations you will also want to look for companies with lower payout ratios and free cash flows.

Source: Seeking Alpha

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