Don’t Dump Dividend Stocks When a Rate Hike Hits

Dividend stocks avoided a knee-jerk selloff last week after the Federal Reserve declined to raise a key interest rate, but rate pressure will continue to make it tough for any security that investors go to for yield. Just remember: That hardly makes it time to ditch your dividend stocks. You can be sure that rate hikes hurt dividend stocks. After all, dividend stocks, and anything else that competes with bonds for investor dollars, have trouble when the central bank enters a tightening cycle. Although bond prices fall amid higher rates, their yields rise, and that makes them more attractive to folks looking for income.

On the upside, any drop in the prices of dividend stocks not only makes their valuations more attractive, it boosts their yields for new money. It’s also helpful to remember that dividends stocks don’t just give up in a rising-rate environment. Dividend stocks can slide in the early part of a rate-hike cycle, but beyond that, their long-term total returns or dividend income levels do as well as any other rate-sensitive asset class. The key here is “long-term total returns,” which is what dividend stocks are for, anyway. A sustained series of higher and higher dividend payments can give long-term investors truly impressive dividend yields on their cost bases.

Source: InvestorPlace

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