Dividend stocks in a rising interest rate scenario
Dividend stocks in a rising interest rate scenario
Last fall I converting all of our TFSA accounts to high dividend payers. So far it has been a bearish experience. Year to date I am a minus 1% and my USA stocks in our retirement funds have given us a 7.5% return . It seems that there is a correlation with interest rates and dividend payers. I expect 2 or 3 increases in the USA and I wouldn't be surprised if there were no more increases in Canada for 2018. This is my speculation . When might one start to see a turnaround for dividend payers? It does puzzle me why there is such a correlation. Interest rates are still very low and the dividend payers give much better yields then fixed income securities.Why is there such a negative correlation?
Re: Dividend stocks in a rising interest rate scenario
Multiple potential reasons:
1 - short timeline, tough to draw meaningful conclusions
2 - in a higher interest rate scenario, theoretically dividends would be increased to maintain the same risk premium over lower risk investments like GICs. If dividends are not increased, the dividend paying stock would look less attractive to an investor
3 - dividend paying stocks became very popular after the recent recession, due to a perception of less risk compared to other equities. Maybe there is less interest in dividend payers as market sentiment changes (total return focus, value tilt, other philosophy?)
1 - short timeline, tough to draw meaningful conclusions
2 - in a higher interest rate scenario, theoretically dividends would be increased to maintain the same risk premium over lower risk investments like GICs. If dividends are not increased, the dividend paying stock would look less attractive to an investor
3 - dividend paying stocks became very popular after the recent recession, due to a perception of less risk compared to other equities. Maybe there is less interest in dividend payers as market sentiment changes (total return focus, value tilt, other philosophy?)
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Re: Dividend stocks in a rising interest rate scenario
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” -- Ben Graham
I would strongly argue that YTD, regardless of where in the year we are, or even 1 year returns, aren't overly useful to evaluate a strategy, unless you are a day trader.
Dividend stocks and dividend growth stocks are a very crowded trade these days (months, years??) with many reaching for yield beyond what's available in "high interest" savings accounts and fixed income instruments such as GICs. A rising interest rate scenario will put pressure on that line of thinking and reduce the attractiveness of dividend stocks and the markets are probably voting again with a different result as you've seen.
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Re: Dividend stocks in a rising interest rate scenario
Not all dividend stocks are the same. Although TRP is down 6.4% and FTS down 5.5%, SLF is up 4% and RY up 3% YTD, just to note some typical examples. Clearly the latter two are expected to benefit by higher rates while the former two will suffer, or so the market believes. Hence the importance of diversification. I think we have yet to see what effects slightly higher rates will have. At a minimum, let them all report Q1 (the banks) or annual returns, as they will in the coming weeks. There will be some nice dividend increases which should add support / upside to some of the names. Better yet, give it 5-10 years and see how things turn out.
Or look at it another way: with attractive yields in the range of 4.4% (TRP) to 5.7% (ENB), maybe now is a great buying opportunity.
Or look at it another way: with attractive yields in the range of 4.4% (TRP) to 5.7% (ENB), maybe now is a great buying opportunity.
Re: Dividend stocks in a rising interest rate scenario
my bank and insurance stocks are the one exception. Rising interest rates are a big plus for their operations.
Re: Dividend stocks in a rising interest rate scenario
It is relatively simple. Capital intensive stocks and highly leveraged companies face disproportionate increases in their debt servicing costs. Some of that is mitigated over time IF they are regulated and can pass on increased costs in their tolls and tariffs, but it is a lagging effect of catchup.
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Re: Dividend stocks in a rising interest rate scenario
As the bull market is working it's way to an end I am looking at rebalancing my USA investments from my Fang stocks and high growth stocks toward big, stable dividend payers . Companies like 3M, PG , Kraft, Merck and Dow Dupont. I figure they are more defensive and will better protect my capital in the event of a serious correction. Jacking up interest rates is one method for bringing about a bear market.
Re: Dividend stocks in a rising interest rate scenario
Take a look at each of those individually on how they chart relative to the market. MMM is almost an exact barometer for the broad market. It is not defensive and reacts somewhat like the old GE did decades ago before it imploded. MMM is one of my few remaining legacy US stocks that I still have not needed to tap for USD cash spending needs.
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Re: Dividend stocks in a rising interest rate scenario
Was that bourne out in previous bear markets? I have yet to see a study that bears out this commonly held thought. I'm not saying it's wrong, I just haven't seen the evidence. Bring up 2008-2009 charts for some of the favorite TSX dividend payers and they were all crushed.- some of the banks saw 60% losses from peak to trough. 3 to 4 raises in 2018 by the Fed and BOC should be priced in at this point? At least partially?Thegipper wrote: ↑28 Jan 2018 12:52 As the bull market is working it's way to an end I am looking at rebalancing my USA investments from my Fang stocks and high growth stocks toward big, stable dividend payers . Companies like 3M, PG , Kraft, Merck and Dow Dupont. I figure they are more defensive and will better protect my capital in the event of a serious correction. Jacking up interest rates is one method for bringing about a bear market.
Re: Dividend stocks in a rising interest rate scenario
He may be talking in relative terms MMM and PG dropped -56% and -41% peak to trough in the 2007-2010 recession according to the Sure dividend video I just watched even XOM was less at -34%. Some of the best dividend aristocrats dropped @ 31% peak to trough so maybe less than Fang stocks would have.thedude99 wrote: ↑28 Jan 2018 13:49Was that bourne out in previous bear markets? I have yet to see a study that bears out this commonly held thought. I'm not saying it's wrong, I just haven't seen the evidence. Bring up 2008-2009 charts for some of the favorite TSX dividend payers and they were all crushed.- some of the banks saw 60% losses from peak to trough. 3 to 4 raises in 2018 by the Fed and BOC should be priced in at this point? At least partially?Thegipper wrote: ↑28 Jan 2018 12:52 As the bull market is working it's way to an end I am looking at rebalancing my USA investments from my Fang stocks and high growth stocks toward big, stable dividend payers . Companies like 3M, PG , Kraft, Merck and Dow Dupont. I figure they are more defensive and will better protect my capital in the event of a serious correction. Jacking up interest rates is one method for bringing about a bear market.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
Re: Dividend stocks in a rising interest rate scenario
thank you for that information. MMM is an industrial so that might not surprise me. I am surprised with PG. How did utilities and pipelines do during that period?BRIAN5000 wrote: ↑28 Jan 2018 16:01He may be talking in relative terms MMM and PG dropped -56% and -41% peak to trough in the 2007-2010 recession according to the Sure dividend video I just watched even XOM was less at -34%. Some of the best dividend aristocrats dropped @ 31% peak to trough so maybe less than Fang stocks would have.thedude99 wrote: ↑28 Jan 2018 13:49Was that bourne out in previous bear markets? I have yet to see a study that bears out this commonly held thought. I'm not saying it's wrong, I just haven't seen the evidence. Bring up 2008-2009 charts for some of the favorite TSX dividend payers and they were all crushed.- some of the banks saw 60% losses from peak to trough. 3 to 4 raises in 2018 by the Fed and BOC should be priced in at this point? At least partially?Thegipper wrote: ↑28 Jan 2018 12:52 As the bull market is working it's way to an end I am looking at rebalancing my USA investments from my Fang stocks and high growth stocks toward big, stable dividend payers . Companies like 3M, PG , Kraft, Merck and Dow Dupont. I figure they are more defensive and will better protect my capital in the event of a serious correction. Jacking up interest rates is one method for bringing about a bear market.
Re: Dividend stocks in a rising interest rate scenario
ED may have been the only utility mentioned -38% one of the better performers most of the better were consumer staples CL, CLX, WMT. There were a few that got thrown out with the bath water that would make good buys after the decline their earnings still held up and price recovered fast.thank you for that information. MMM is an industrial so that might not surprise me. I am surprised with PG. How did utilities and pipelines do during that period?
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
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Re: Dividend stocks in a rising interest rate scenario
At what point can we say that the dividend stock sell-off is overdone? Cause it sure is starting to feel like that now.
Re: Dividend stocks in a rising interest rate scenario
They'll continue to go down as long as bond yields keep rising.JaydoubleU wrote: ↑02 Feb 2018 11:07 At what point can we say that the dividend stock sell-off is overdone? Cause it sure is starting to feel like that now.
https://www.investing.com/rates-bonds/c ... bond-yield
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Re: Dividend stocks in a rising interest rate scenario
Short memory? The sell-off in dividend stocks was overdone in 2008!JaydoubleU wrote: ↑02 Feb 2018 11:07 At what point can we say that the dividend stock sell-off is overdone? Cause it sure is starting to feel like that now.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
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Thomas Babington Macaulay in 1830
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Re: Dividend stocks in a rising interest rate scenario
Oh, I remember it well. A difference between then and now was that I was still accumulating then, so it worked to my advantage. Then, the global financial system seemed on the verge of collapse, and interest rates were falling. Now, we are supposedly in boom times and interest rates are on the rise. But I am no longer accumulating (much).Short memory? The sell-off in dividend stocks was overdone in 2008!
I am tempted to take my house downpayment and buy stocks. House be damned, I'll rent with the dividend income!
Re: Dividend stocks in a rising interest rate scenario
3% on the 10 year Treasury seems to be consensus for things to go BOOM. We are at 2.85% today up from 2.7% last week and 2.1% in the last year. TICK TOCK TICK TOCK
OH in January 1987 we had:
-new Fed Chair
-largest one month gain to start the year
-rising 10 year Treasury
We all know what happened then.........
OH in January 1987 we had:
-new Fed Chair
-largest one month gain to start the year
-rising 10 year Treasury
We all know what happened then.........
Re: Dividend stocks in a rising interest rate scenario
I think it matters more if the yield curve inverts rather than absolute yield values of 5 and 10 year bonds.
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Re: Dividend stocks in a rising interest rate scenario
If the yield curve inverts, this signifies coming recession, right? Doesn't that imply an end to interest rate increases, or at at least a slowdown? That should be a bullish sign for utilities, no? Central banks want to end this unnatural period of excessive liquidity, but they don't want to stamp out economic growth.
Re: Dividend stocks in a rising interest rate scenario
Laissez les mal temps roulez !!
(for those of us still in accumulation mode....)
(for those of us still in accumulation mode....)
Re: Dividend stocks in a rising interest rate scenario
That is the classic scenario, but another one is the risk of stagflation where central banks have not done enough to raise interest rates and inflation occurs without growth. Does not mean clear sailing for dividend stocks. IMO, they have been overbought for a number of years.JaydoubleU wrote: ↑03 Feb 2018 08:14 If the yield curve inverts, this signifies coming recession, right? Doesn't that imply an end to interest rate increases, or at at least a slowdown? That should be a bullish sign for utilities, no? Central banks want to end this unnatural period of excessive liquidity, but they don't want to stamp out economic growth.
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Re: Dividend stocks in a rising interest rate scenario
So to sum up today's investment environment
-Bonds are guaranteed to lose $ as yields soar
-Growth stocks are at historically high valuation levels 2nd only to the eve of the 1929 crash
-The widows and orphans stocks are dead due to the first point.
-Bonds are guaranteed to lose $ as yields soar
-Growth stocks are at historically high valuation levels 2nd only to the eve of the 1929 crash
-The widows and orphans stocks are dead due to the first point.
Re: Dividend stocks in a rising interest rate scenario
I think the actual effects will be much less dramatic than you suggest. 2018 may just be a 'nothing' year overall in terms of performance returns. Even a full blown correction of 10-15% could be a very good thing to bring valuations back into line and burst some bubbles. It is not something to lose sleep over.
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Re: Dividend stocks in a rising interest rate scenario
Hyperbole, dude is your name!
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Re: Dividend stocks in a rising interest rate scenario
I know this is a little OT, but...
Based on what many of you have said above, do you all think it might be a good time to get out of a bond fund? I'm in XSH and it's not starting to turn around the way I'd hoped. After about 1 year, of holding it, the drop in unit price has now wiped out my gains. Maturity is typically 3-5 years, but not sure I can wait that long to see my unit price come back.
Based on what many of you have said above, do you all think it might be a good time to get out of a bond fund? I'm in XSH and it's not starting to turn around the way I'd hoped. After about 1 year, of holding it, the drop in unit price has now wiped out my gains. Maturity is typically 3-5 years, but not sure I can wait that long to see my unit price come back.