How Income Stocks Falter as Interest Rates Rise

High-dividend-paying stocks have historically underperformed stocks which do not pay a dividend when interest rates were rising

Alex Bryan 27 January, 2017 | 8:45AM
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Rising interest rates can clearly hurt investment returns. As rates rise, the expected returns for all securities must increase to stay competitive, which often requires prices to fall.

While it is more difficult to estimate the interest-rate sensitivity for stocks than bonds because their cash flows aren't fixed, some stocks clearly have greater interest-rate risk than others. For example, high-dividend-paying stocks have tended to be more sensitive to interest-rate fluctuations than their lower-yielding counterparts.

It may be intuitive to surmise that this is because investors pile into higher-yielding stocks when interest rates fall to make up for lost income and move that money back into fixed-income assets when rates rise. But a closer look suggests that differences in cash flow volatility can better explain this relationship.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Alex Bryan  is an ETF analyst with Morningstar.

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