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How Dividend Growth Investors Can Prosper Even If Interest Rates Increase

Aug. 22, 2016 10:23 AM ETKO, MKC, JNJ, ED, BF.B
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Last week, I wrote a groundbreaking article, which outlined the basic premise that interest rate levels affect P/E ratios that investors are willing to pay for stocks. I also made the call that even at a P/E of 20, stocks are cheaper relative to bonds, and could withstand doubling or tripling of the interest rates, while still remaining more attractive, relative to bonds. So there is some margin of safety in common stocks today, relative to bonds.

The only way that bonds do better than stocks over the next ten or twenty years is if we get deflation, and we experience a situation that is similar to Japan between 1990 - 2016 or US between 1929 - 1933. Just to be on the safe side, when I discuss bonds or fixed income, I want you to know that I mean long-term US Treasuries.

The interesting part is that a lot of pundits have been expecting higher interest rates in the US for the past 8 years. Their train of thought has always been that these rising interest rates will potentially reduce the demand and prices for stocks, and dividend stocks in particular. A lot of investors have been deceived by this train of thought.

These pundits have been wrong for 8 - 9 years in a row. Interest rates have been declining, and stocks have been rising. Unfortunately, many companies are selling above 20 times earnings these days.

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