How Will Rising Interest Rates Impact Dividend Stocks?

Terrific! …. But…interest rates are a factor in the pricing of dividend-paying stocks. Common stock prices may rise with inflation; while preferred shares are unlikely to rise much over par value.

I contacted Tim…

DENNIS: Tim, on behalf of our readers, thank you for your time. We are in the midst of yet another bailout package. Meanwhile, interest rates, inflation, and the stock market continue to rise.

Chuck Butler recently explained the economy is sluggish.

Tim, I used an analogy you would like about what the instrument panel shows, versus what is really happening in the economy.

I’m hoping you can help us decipher things correctly and keep us on course.

My first question is – Tim, I know we are guessing, but do you see interest rates continuing to rise? With yet another huge bailout, the government is going to need to raise a couple trillion more.

TIM: Dennis, thanks for the opportunity to address your readers. I like your analogy about combining what the instruments are showing with instinct and good judgment.

Unless the rules of economics have been suspended, I think it is inevitable that we will see higher interest rates. The federal government is printing trillions of dollars, and that money will be looking for goods and services and places to be invested.

The result should be inflation, a booming stock market, and higher interest rates. I expect rates to return to at least the pre-pandemic levels, and possibly much higher.

Against this rising tide stands the Federal Reserve. They can hold rates down by buying up most of the new debt issued by the government. Or at least they believe they can.

DENNIS: I’d like to discuss common and preferred stocks independently. I look at preferred stocks as a hybrid, a cross between a fixed income debt instrument, and a stock. What effect will interest rates, up or down, likely have on our preferred stock holdings?

TIM: Just like bonds, preferred stock market prices will fall if interest rates go high enough. However, our preferreds yield 6% to over 7%, so rates would need to go up much higher to materially affect share prices.

Even if preferred stock prices decline by a couple of dollars, the dividends will continue to be paid. The probability of a preferred being redeemed will be lower since the issuer would have to issue debt to redeem a preferred stock.

The preferred dividends can continue indefinitely, providing a steady income, no matter what is happening in the stock market.

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