Dividend Strategies As Rates Rise

ratesSince interest rates began rising earlier this summer, some market watchers have been declaring the dividend trade a thing of the past. It’s no wonder, then, that many clients are asking me if it’s time to abandon dividend payers.

This is just one of the questions about dividend investing I’ve been hearing lately during my sales conversations. So, as it has been a more than a year since I last debunked misunderstandings about dividends, I’ve gathered some of these dividend-related questions, and my answers, below.

In the comments section, let me know if you have other questions about dividend investing you’d like me to answer in a future post.

Q: Amid the recent rise in bond yields, should investors flee all dividend stocks?

A: My colleague Russ Koesterich has long advocated – even before rates’ recent rise – that investors should be selective when searching for dividends.  While certain dividend-paying sectors (like global utilities) look crowded and expensive, he believes that there are still opportunities to be found in the US equity market such as mega caps and energy companies.

In addition, Russ has long suggested looking abroad for dividend income, and he still believes that there’s a strong case for investing in international dividend stocks. For instance, as he pointed out in a recent post, non-US dividend companies still offer more enticing yields than fixed income and US dividend counterparts. Plus, Russ believes that international dividend stocks are likely to pay higher yields for the foreseeable future given that he expects rates to hover where they are in the near term.

Q: Does a company’s past dividend-paying history guarantee future dividend payments?

A: Just as past performance doesn’t guarantee future results when it comes to stocks, just because a company paid generous dividends in the past doesn’t mean that it will continue doing so in the future. In fact, according to one analysis, more US firms decreased dividends  in the first quarter of this year than did during the same period last year.

This is partly why it’s so important to consider index methodology when selecting a dividend-paying ETF. As another one of my colleagues, Dominic Maister, wrote last fall,many dividend indices are based entirely on backward looking data and may merely require included companies have a long history of dividend payouts. This methodology can be problematic for a fund’s performance, however, when top holdings make drastic dividend cuts.

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