How Will Dividends Fare When Rates Rise?

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Includes: ADX, DHS, DLN, DTD, DVY, DVYL, FDL, FVD, IEF, SCHD, SDOG, SDY, SDYL
by: Reality Shares Research
Summary

The 10-Year Treasury note recently broke through its highest yield since November 2014, and many investors are concerned about a peaking bond market.

The dividend experts at Reality Shares analyzed how dividends have performed in historic bond market correction scenarios.

Historic evidence suggests that dividends on the S&P 500 remain relatively protected against 10-Year Treasury downturns.

By Ivy Chen, Analyst, Reality Shares, Inc.

The 10-Year Treasury note recently broke through its highest yield since November 2014, and many investors are concerned about a peaking bond market. As a result, investors who sought refuge in dividends over the past several years as an alternative to meager bond yields are now taking another look at the bond markets, so the dividend experts at Reality Shares analyzed how dividends have performed in historic bond market correction scenarios. The results may provide some insight into the near future as market participants position themselves for a Federal Reserve rate increase this year.

What follows are charts depicting how dividends have performed in historical rising rate scenarios:

From 1972 through 2014, S&P 500 annual dividend growth was positive in 40 out of 43 years:

Source: Bloomberg, Compustat, Reality Shares Research, Treasury Department

From 1972 to 1981, the 10-Year Treasury rate jumped from 5.95% to 14.59%. During this time, S&P 500 dividends* still increased significantly, from $3.07 to $6.63 (up 116%).

Source: Bloomberg, Compustat, Reality Shares Research, Treasury Department

From 1987 to 1988, the 10-Year Treasury rate increased from 7.08% to 9.09%. During this time, S&P 500 dividends still increased moderately, from $8.28 to $9.64 (up 16%).

Source: Bloomberg, Compustat, Reality Shares Research, Treasury Department

In 1994, the 10-Year Treasury rate jumped from 5.75% to 7.78%. During this time, S&P 500 Dividends still increased slightly, from $12.69 to $12.97 (up 2%).

Source: Bloomberg, Compustat, Reality Shares Research, Treasury Department

In 1999, the 10-Year Treasury rate rose from 4.72% to 6.66%. During this time, S&P 500 dividends still increased slightly, from $15.95 to $16.29 (up 2%).

Source: Bloomberg, Compustat, Reality Shares Research, Treasury Department

In 2009, the 10-Year Treasury rate increased from 2.52% to 3.73%, while the S&P 500 dividends decreased from $28.46 to $23.59 (down 17%). This was the only year between 1972 and 2015 in which dividends decreased in a rising rate environment. It is important to note that this time period also included a massive correction in the SPX price as companies were feeling the effects of the credit crisis.

Source: Bloomberg, Compustat, Reality Shares Research, Treasury Department

Federal Reserve Chair Janet Yellen recently commented, "If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target." Some speculate that the Fed could raise rates as early as September. While this may have devastating effects on the bond market and could potentially trigger a sell signal to the equity markets, historic evidence suggests that dividends on the S&P 500 remain relatively protected against 10-Year Treasury downturns.

Business Relationship Disclosure: This article was written by Reality Shares, Inc. Research Team. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.