Will Rising Bond Yields Sink High-Dividend Stocks?

High-dividend stocks do resemble bonds in some respects, and investors may indeed expect them to serve as bond substitutes in some portfolios, by the logic that when rates go up, they will lag or lose out to the broad equity market, because that's what bonds typically do when rates rise. Is that really true, though? We find the evidence to support it rather weak.

There were bond fund managers in 2009 and 2010 predicting that 10-year Treasury rates would be north of 8% before long. Meanwhile, an entire category of nontraditional bond funds exploded in size under the marketing of protection from rising rates; even with yields having backed up again sharply since mid-2016, their returns since the financial crisis still lag those of core bond funds with significantly less credit risk. Given all that uncertainty, it is much more important to remember that high-dividend stocks have outperformed over the long term, even if having high dividends is one of the less reliable short-term factors. A long-term investor would be better off keeping this chart in mind rather than trying to outguess how stocks are going to react to bonds.

Source: Morningstar

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