It's conventional wisdom that when interest rates rise, investors should steer clear of stocks with high dividend yields.
The logic is simple: Rising rates make the yields offered by equities less attractive by comparison, and since those stocks rely so heavily on their appeal as so-called yield proxies, any competition can lead to selling.
While Goldman Sachs acknowledges that this dynamic is true to a degree, it argues that stock gains can still be found among high-dividend payers — as long as investors know where to look. To Goldman, the key is not how much these stocks are paying in dividends, but how quickly they're growing that yield. By its measure, the top 25% of dividend-growers in the S&P 500 have outperformed during past rising-rate environments.
"With the spectre of rising rates, we expect that dividend growth stocks will be relatively more immune," Jessica Binder Graham, an analyst at Goldman, wrote in a note to clients. "We find that the high dividend growth stocks not only outperform high yield, low growth stocks during rising rate environments... but also continue to outperform the broader index."
It's an important discussion to be having right now, considering the Federal Reserve is expected to raise interest rates three times this year, with more-hawkish commentators calling for four hikes. In a written testimony released Tuesday morning, the Fed's chairman, Jerome Powell, did nothing to shift these expectations.
"Some of the headwinds the US economy faced in previous years have turned into tailwinds," Powell said. "Fiscal policy has become more stimulative, and foreign demand for US exports is on a firmer trajectory."
As income investors — traders who seek yields such as those provided by dividends — await further signals from Powell and the Fed, they can rest easy knowing there's at least one segment of their universe that should stand tall as rates rise.
Source: Goldman Sachs
Jr Trader Petar Milanov
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not directed at residents of the United States or Belgium and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.