Tough Times for Dividend Stocks

The WSJ recently noted that high-dividend stocks have been losing out in the market recently. Utility stocks badly lagged the market in February and haven’t done much since. REIT stocks, which tend to have generous yields, have followed a similar path.

Utilities, real-estate investment trusts and master limited partnerships have been lifted since the financial crisis by a flood of money from portfolio managers and retirees starved for steady investment income amid low bond yields. Investors plowed $48.4 billion into mutual and exchange-traded funds tracking utilities and REITs from 2010 through 2014, according to Morningstar Inc.

But portfolio managers are pulling back from these shares in 2015, as the prospect of the first short-term interest-rate increase by the Federal Reserve in nine years makes high-dividend stocks less attractive. Investors reason that higher rates will boost the payout—and therefore the appeal—of more stable income-paying investments, like government and corporate debt.

Check out this chart. This shows the REIT index divided by the S&P 500 (in blue) along with the utility index divided by the S&P 500 (in black).

This is a good example of what I described two weeks ago in my “Elfenbein Theory” on the market. What we’re seeing is an anti-Quadrant III rotation.

The underlying message of this rotation is that the market is preparing itself for higher interest rates.

Posted by Eddy Elfenbein on June 2nd, 2015 at 2:16 pm

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