Rising rates could continue to knock high-dividend stocks lower

The prospect of rising interest rates in 2014 is sending shares of high-dividend-yielding companies lower as fixed-income assets become more attractive to investors.

The Dow Jones U.S. Select Dividend Index has lagged behind the Standard & Poor’s 500 Total Return Index by 4.6%age points on a total-return basis since April 30. During the same period, the yield on 10-year U.S. Treasuries has risen to 2.88% from 1.67%. The dividend group fell to its lowest level in more than a year Dec. 11 relative to the broader gauge.

The dividend index — made up of 100 companies including cigarette maker Lorillard Inc. and Chevron Corp. — has weakened since the Federal Reserve began bracing investors for a phase-out of its unprecedented monetary stimulus. At the conclusion of a two-day meeting May 1, the Federal Open Market Committee said in a statement it was “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

Amid this environment, “stocks that have been hurt the most are those that benefited a lot from lower interest rates,” said Brad Kinkelaar, executive vice president and portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., which oversees $1.97 trillion in assets.

Shares of telecommunication, utility and real-estate investment-trust companies have been hardest hit, said Mr. Kinkelaar, who manages two dividend strategy funds. “If rates continue to rise through 2014, albeit gradually, these stocks should continue to underperform the market.”

The yield on 10-year Treasuries will increase to 3.37% by the end of 2014, according to the median forecast of economists surveyed by Bloomberg.
(Bloomberg News)