The economy keeps getting better and the Stock market has gone up two and a half fold since the depths of the Great Recession. The Federal Reserve is on the verge of another interest rate hike. As rates go up be careful of interest Rate Sensitive Stocks. CNBC mentions four stocks that could be in the danger zone.
If bond yields keep rising, investors may want to shy away from stocks that are prized for their standout dividend payments.
On Wednesday, after a report showing strong employment growth increased economic optimism and solidified the belief that the Federal Reserve would raise rates next week, Treasury bond yields increased sharply. This, in turn, sent stocks with high dividend yields sinking.
High-yielding stocks often move alongside bond prices, and thus inversely to yields, leading some to label them “bond proxies.” The thinking is that as bond yields rise, the money that can be made in high-dividend stocks becomes that much less enticing. While some have argued that this represents a massive case of erroneous group-think, it nonetheless seems to describe how markets act.
The four stocks they mention are Frontier Communications, Iron Mountain, Welltower and Ventas. Three of these are real estate trusts and the fourth is a rural-focused telecom company whose stock has slid by a half in the last year. Obviously any stock that will prosper in a healthy economy is not in this list. Rather stocks that stand out solely because of a high dividend are ones you should be careful of.
How about Utilities?
A standard widows and orphans approach to investing commonly includes utility stocks. ETF Daily News writes that the utilities sector still has opportunities if you pick and choose correctly.
This boring and predictable model means utilities tend to attract risk-averse investors who jump out during times of extreme caution—even when there’s really nothing to be cautious about. That’s why the Utilities Select Sector SPDR ETF (XLU) erased much of its 2016 gains in the second half of the year, when the months leading up to the presidential election led to market panic.
What’s even more interesting is that utilities continued to fall even after Donald Trump won and the so-called “Trump rally” began. Utilities only really began to recover in full at the start of 2017, meaning utility investors are sitting on 20% gains from the start of 2016 to today, excluding dividend payouts.
That’s great if you’re in utilities now, but what if you missed the boat? It’s clearly too late to buy into XLU, but that doesn’t mean the utilities sector remains perfectly efficient. It just means we have to be more selective, instead of simply letting the index pick our stocks for us.
Their suggestions include WEC Energy Group, Great Plains Energy, SCANA, Dominion Resources and Northwestern. Look for solid fundamentals and steady growth.
Or Pharmaceuticals
Big pharma is a place to find good dividends but if the company is not growing you need to be careful and treat them as interest rate sensitive stocks. If on the other hand the company has great new products in the pipeline it will have steady growth ahead and that grow will help keep dividends coming.
Be Careful of Interest Rate Sensitive Stocks PPT
