Dividends & Income Digest: What Do Rising Interest Rates Mean For Dividend And Income Investors?

Includes: MMM, NVDA, SPG
by: Rebecca Corvino


Every issue, SA explores a dividend and income investing question and shares the responses, as well as highlights some of the week's insightful pieces of opinion and analysis.

This week, contributors answer the question: "What are the implications of a rising-rate environment for dividend and income investors in 2017 and beyond?"

What should Seeking Alpha be tracking in the dividends & income world? Leave a comment to let us know. Or better yet, submit an article of your own.

I've had the pleasure of "meeting" some of you already, but for those of you who don't know me, I'm the new editor on Seeking Alpha's Dividends & Income beat. I plan to continue the good work done by my predecessors to carry the Dividends & Income Digest forward in the months and years ahead.

Former editor Robyn Conti's shoes are big ones to fill, indeed, and I'm grateful to her for creating this platform. I hope it will enable me both to get to know all of you better as well as to facilitate ongoing, insightful conversation among regular (and future) D&I readers and investors.

I've already learned a great deal from the Dividends & Income community, and I'm excited to carry on and expand the conversation here every couple of weeks with our valued writers and commenters. I'm here to work with you and for you to facilitate your meaningful contributions. Please never hesitate to reach out to me with feedback of any sort.

With that said, let's get to it. I'm going to piggyback off of Gil Weinreich's most recent digest and put a follow-up question to you:

What are the implications of a rising-rate environment for dividend and income investors in 2017 and beyond?

Here are some of your responses, and please, continue the conversation in the comments below. I'm eager to read what you all have to say.

Happy New Year, and happy investing!

Bob Wells:

Many retired Dividend Growth Investors favor stocks that tend to be more interest-rate-sensitive. In the year ahead it is likely we will experience greater overall portfolio volatility than we've grown accustomed to in the defensive sectors. That said, I have no plan to reduce exposure to these sectors. Looking beyond 2017, the thing I'll be watching is the rate of dividend growth experienced by the 'defensives' and whether that contracts or expands.

Arbitrage Trader:

People need to understand what drives their investments and not to get blinded by their good results. Buy and hold is a simple strategy, and when your results are great, keep your feet on the ground - you did nothing special. If you were an income investor in the last seven years, remember the seven years of hunger in Egypt. This is one of the good lessons of history. Hedge your prosperity and exclude interest rate risk from your portfolio.

Several ways to do that:

1. Learn the yield curve, rates, yields, Libor, etc. These are all different things. 10-year treasury yield and the fed funds rate do not have a constant spread. Your investments are most likely to follow the risk-free rate with the same maturity, so do not blindly concentrate on the fed funds rate.

2. Include shorts in your portfolio to hedge your interest rate risk. There are a lot of ETFs that follow treasuries. and you can hedge your interest rate risk easily. Don't forget that this will eliminate any profit if yields go lower again. You can also short some of the overvalued fixed income instruments. A very good example is in this article.

3. Switch to instruments with low duration. You may pay a little extra taxes if you switch to bonds, but they will mature and save you from interest rate risk. Term-preferred stocks are another option. These articles might be helpful: 'The Most Interesting Preferred Stock Has No Interest Rate Risk,' 'Baby Bonds' and 'Term-Preferred Stocks To Save You From Interest Rate Risk.'

4. Be prepared for worst-case scenarios. Oil companies went bankrupt because they were not prepared for a worst-case scenario. This article was written in April, for example, when fixed income was booming. You always need to be prepared.

After all, losing money is always helpful. You then start to read and learn more. An animal will not touch a hot object twice, and you shouldn't either. Yields may not rise at all in the near future, and this is my personal view, but you need to be prepared, because you never know what will happen. (And if you do know, you will not be reading this.)

Mike Nadel:

Frankly, I don't know what the implications of a rising-rate environment are for dividend investors. Intuitively, rising rates would hit the share prices of REITs, utilities, maybe some consumer staples and perhaps a few other sectors, while boosting the financial sector.

But so much about this bull market has ended up being counterintuitive. And certainly, with so little known about which policies - financial and otherwise - our new president will be able to enact, there just isn't enough to go on now.

As for those who claim to know how all of this will play out - I wonder how they possibly could be so certain.

So for me, it will continue to be about owning high-quality companies and buying them at attractive valuation points. That goes for REITs, utes, the whole shootin' match. I really don't know another way to approach things.

Adam Aloisi:

The key to the ultimate equity reaction in a rising-rate environment is the velocity at which rates actually move to the upside. Several hundred basis points of Fed tightening in one year, like we saw in 1994, or a rogue move in the bond market, such as 2013's taper tantrum, or 2016's post-Brexit move, will create severe near-term volatility. In a general sense, rising bond yields are going to create a repricing of equity dependent upon single-security discounting relative to the extent and sustainability of rate rises.

As we've already seen this year, REITs with long-term contractual duration have sold off post-Brexit, while financials and securities with floating rate characteristics have rallied. Even companies in similar sectors may react with polarity depending on the nature of the business model, debt profile, and velocity of rate increases. The major outtake here is that investors must realize the heterogeneity of the question, i.e., there are many ways in which a 'rising-rate environment' may play out and, consequently, how individual equity will react - assuming we're actually staring at a secular reversal in the first place.

On another level, rising rates will increase the attractiveness of non-equity fixed price assets. The extent of the allure will again be predicated on how much, and how quickly, rates rise and how investors weigh the forward risks/rewards and spread of income between fixed coupons and income-growth-type vehicles.

As the forward global macroeconomic environment becomes increasingly complex, it would seem unwise to meaningfully concentrate income leverage on single play out assumptions - which means diversity and devil's advocate thinking are more valuable to the do-it-yourselfer than ever.

Again, please share your own thoughts in the comments below. For now, I'll leave you with a list of some recent Dividends & Income content you might want to check out (if you haven't already).

Top REIT Ideas: Shining The Spotlight On Income And High Yield - 2016 Recap by Bill Stoller

High-Yield Investing: Best Stocks And Sectors For 2017 by Rida Morwa

Mark My Words, Realty Income's Dividend Will Keep Growing by Brad Thomas

NVIDIA: A Stupendous Dividend Growth Stock, But You'd Be Crazy To Buy Right Now by Dividend Sensei

3M: Interesting Yield, But Still Too Expensive by Reuben Gregg Brewer

Simon Property Group: Investors Continue To Focus On The Wrong Metrics by Michael Boyd

Dividends: Fad? Bubble? You Must Be Kidding! by Adam Aloisi

Closed-End Funds: When Simple Statistics Beats Fundamental Knowledge, Part 1 by Arbitrage Trader

Dividend Growth 50: Nothing Terrible About This Precocious 2-Year Old - Part 1 by Mike Nadel

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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