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What Happens To Large Caps When The 10 Year Rises?

June 23rd, 2014

raises-questionsOver the past 50 years, the average yield on the 10-year Treasury has been 6.6%. We hit 2.42% in the last few weeks, and that means there is plenty of room to move way up. There has been a lot of talk about what will happen to Treasury bonds when interest rates move up, but very little talk about the effect an unavoidable increase in interest rates will have on stocks.

As with bonds, there will be some stocks that will do better than others. Namely, companies with modest dividends and the potential for fast growth. History tells us these outperform in an increasing rate market.

A study of past periods when the 10-year Treasury’s yield has increased by a half of a percentage point showed large cap stocks with modest dividends and growth potential returned an average of 20% in the 12 months following the increase.

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Companies like Schlumberger Limited.(NYSE:SLB), Caterpillar Inc.(NYSE:CAT) and The Walt Disney Company(NYSE:DIS).

Schlumberger has a puny 1.5% dividend and an 18% five-year growth estimate.

Disney yields 1% and is estimated to grow 16% per year.

And Caterpillar, the highest of the payers, has a 2.2% yield with a 12% growth estimate for the next five years.

When rates finally move, it will be a whole new ball game for stocks and bonds. Make the necessary changes before the horse gets out of the barn.

It’s Not Different

As long as we are on interest rates, here’s one that will really pop your cork.

Spain is paying less to borrow money than the USA.

Yup! You heard me right.

Right now the benchmark 10-year Treasury in the U.S. pays around 2.6% to about

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