With rising rates there has clearly been some rotation out of high dividend shares in the US.
StarTribune: – This exodus out of bond funds has touched the stock market in two different ways, investors say, starting with dividend-paying stocks.
Shares in industries such as utilities, pharmaceuticals and telecommunications are often purchased because they provide a higher-than-normal dividend. As Treasury yields rise, it makes all dividend-paying stocks less attractive to investors. That’s because Treasuries can provide a similar return with significantly less risk.
Dividend-paying stocks have been hurt the past month. The S&P Utilities index is down nearly 5 percent while the S&P Telecommunications index is down 4 percent. Another type of investment that got hit in recent weeks was real estate investment trusts — investment companies that focus on buying and managing real estate. An index that tracks REITs, as real estate investment trusts are commonly known, is down nearly 8 percent.
Yes, many fixed-income-like assets such as utilities shares and REITS have taken a beating. But in spite of that, companies that have focused on consistently paying higher dividends over time are still outperforming the S&P500 on a year-to-date basis. The chart below compares the total returns of two ETFs: SDY (based on the S&P High Yield Dividend Aristocrats® index) and SPY (S&P500).
While dividend shares become less attractive relative to bonds after rates rise, in an environment of economic uncertainty there is still demand for firms who are able to pay consistent dividend. And there is no shortage of economic uncertainty these days.
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