Rising Rates Won't Be Enough To Curb Stocks

Since Fed taper talks began in early May, 10-year U.S. Treasury yields have risen from a 1.6% to 2.9%, an increase of nearly 100%. At their current pace, rates will be near 4% by year-end. Worries that the Federal Reserve might taper their Quantitative Easing program have speculating futures traders betting on higher rates in the near-term. We don't believe it. The question is not as much where rates are headed, but how quickly they will get there.

Dividend stocks have been favored in this market and we believe that trend will continue. While earnings on a year-over-year basis are up only about 3%, dividend growth since the beginning of the year is already up nearly 9%. It is clear that companies understand that investors are rewarding dividend payers. A 3% yield on the 10-year U.S. Treasury is still too low. With the Fed targeting inflation at 2%, the 10-year yields a mere 1% after-inflation return. That is not enough for pension funds, insurance companies, college endowments, charitable foundations, or retirees who need to live on investment income. Corporate America is aware of the lack of good fixed income alternatives. That is why we believe companies are going to continue to pay a lot of attention to dividend growth because it is clear that it is desirable and needed by the investing public.

Source: Seeking Alpha

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