A Warning on U.S. Dividend Stocks, ETFs

Once the Federal Reserve hikes interest rates, U.S. dividend stocks and exchange traded funds could experience a meaningful correction after investors piled into the yield-paying assets during the low rate environment. “With investors desperate for yield, dividend-paying stocks have become more attractive and in some cases have been bid up to unsustainably high valuations,” writes Jeffrey J. Winkler, Vice President, Senior Portfolio Manager, Financial Advisor, Senior Investment Management Consultant for Morgan Stanley. “As a result, we are seeing a meaningful correction in some of these stocks this year as interest rates move higher, particularly in the US where QE is finished.”

Specifically, Winkler warned investors of utilities and real estate investment trusts, which have already experienced significant declines this year. Broad dividend ETFs are already falling off this year. Year-to-date, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) dipped 0.9%, iShares Select Dividend ETF (NYSEArca: DVY) fell 2.6% and the SPDR S&P Dividend ETF (NYSEArca: SDY) declined 1.3%. [Tried and True Vanguard Dividend ETF Faces Near-Term Challenges] Meanwhile, the Vanguard REIT ETF (NYSEArca: VNQ), which tracks U.S. REITs, decreased 4.3% and the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF, dropped 9.4% so far this year. [Utilities ETFs at a Critical Juncture]

Source: ETF Trends

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