Rising Rates Don’t Have to Hurt High Dividend Stocks
Many factors affect high dividend stocks
Rates remain low by historical standards
Quality companies perform well long term
City National Rochdale’s High Dividend Income strategy focuses on stocks with attractive yields, raising the question: How can these stocks perform in a rising interest rate environment, especially after a difficult first quarter?
Our strategy relies on lengthy historical analysis showing that there has not been a strong correlation between the long-term returns of high dividend stocks and periods of rising interest rates. Many other factors affect these stocks, including the growth rates of income and cash flows at the companies, expectations about the operational states of the underlying businesses, the condition of the equity markets, and the strength and growth rate of the overall economy. In some cases, higher rates have corresponded with a negative price performance of high dividend stocks; in other cases, price performance was positive as rates rose. Our data showed no sustainable pattern or high correlation.
In past periods, we have experienced short-term volatility in our dividend stocks when expectations for higher rates were suddenly heightened. Our view is that much of the weakness in dividend stocks in the first quarter was due to outsized expectations regarding higher rates. Although the Fed is expected to increase the fed funds rate three more times this year, with the 10-year Treasury rate being range-bound, it’s important to remember that interest rates, both short and long, are currently quite low by historical standards.
We conclude that rates are not the main driver of performance for income stocks over the long term if other significant factors are at play, such as solid cash-flow growth. At the same time, we are aware that rising rates (or heightened expectations of increases) can result in short-term price volatility, and our experience tells us that continued caution is in order in the near term. Our focus will remain on identifying undervalued, high-quality companies with solid prospects for dividend growth over time under most conceivable economic environments.