Dividend Paying Stocks in a Rising Interest Rate Environment?

Many attribute the latest weakness in relative performance for dividend payers to the dramatic rise in interest rates. Incredibly, it was the fear of a ‘Tapering’ in the Federal Reserve Quantitative Easing program ($85 billion in monthly bond purchases) that sent the yield on the 10-year Treasury soaring from 1.6% on May 2 to 2.6% on August 2. All things being equal, one would think that investors would find dividend-paying stocks more attractive when the yield on the S&P 500 exceeds the yield on the 10-year.

It is hard to argue with the observation that dividend-paying stocks are in vogue when rates are moving lower and they fall out of favor when rates are moving higher…unless one actually looks at the weight of the historical evidence. While anything can happen in the short run, a review of subsequent 12-month returns when the 10-year Treasury yield and the Fed Funds rate have moved higher and lower over 1- 3-, 6- and 12-month periods tells a different long-term story. Believe it or not, the analytics show that on average dividend payers have outperformed non payers. Yes, stocks generally have done better in a declining rate environment, but the odds favor dividend payers even when rates are rising. And it is interesting to see the returns when the Fed Funds rate is high. Of course, none of us want to see Fed Funds above the 5.01% historical median anytime soon!

Source: Forbes

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