Why Dividend Stocks Are Off

At some point this year, interest rates should go up. What will happen then to dividend-paying stocks? Because they benefited when fixed-income rates were low, they will dip – and some already have, in anticipation. Over the long pull, however, dividend payers do well. In an era of low interest rates, the dividend stock trade was a good place to be. Getting a higher yield on a good-quality stock than you can on a 10-year Treasury bond seems like a no-brainer. The Federal Reserve will eventually start raising short-term interest rates, and this likely will lead to higher yields on longer-term bonds like the 10-year Treasury.

All that said, history indicates that dividend stocks do the best in the long run. According to Ned Davis Research, from 1927 through 2013, dividend payers returned 9.3% annually, on average, versus 2.3% for non-payers. And companies that increased their dividends or started paying them were up 10%. During stock bear markets, payers got hurt the least, down 17.9%, versus negative 31.1% for non-payers. Bottom line: dividend stocks mostly perform well, regardless of the rate climate. They pay you to own them.

Source: Morningstar

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