How Will Rising Interest Rates Impact Dividend Stocks?

Should preferred stocks drop below par value it could signal an excellent buying opportunity. It depends on the individual company so they must be looked at independently.

DENNIS: Would your answer be any different if I had said common stocks?

TIM: If interest rates are rising, common stock share values and dividends will depend on the businesses of the individual companies. Higher interest rates will lead to higher profits for lenders such as banks and business development companies (BDCs).

Other types of companies will suffer. For example, the highly leveraged agency Mortgage backs securities Real Estate Investment Trusts (MBS REITs) will have to deal with falling prices in their bond portfolios. Any company that is highly leveraged could be squeezed if they cannot increase the cost of their goods or services as fast as the debt servicing costs grow.

DENNIS: If interest rates continue to rise and bond prices drop, might that help the dividend-paying stocks? I wonder how much investment capital would go toward higher interest-paying bonds versus stocks.

TIM: Higher interest rates may change, either positively or negatively, the business prospects of individual companies. Income-focused investors may need to pivot out of some income investments into others that will thrive with higher interest rates.

Investors need to watch for opportunities, if the market drives down the share prices of quality dividend investments, it will be time to load up and lock in some great yields.

I would avoid generalization and investing in a lot of funds – each company must be judged on their own merits.

“In the midst of chaos, there is also opportunity.”
— Sun-Tzu, The Art of War

DENNIS: Back in my Casey Research days, my analysts preached about negative correlation (one zigs, the other zags) and non-correlated assets.

If something goes down, other profit opportunities may pop up.

Should interest rates continue to rise, where should investors look for profit opportunities?

TIM: Higher rates will be great for profits at financial companies including banks, Business development companies (BDCs) as mentioned above, and life insurance companies.

If the higher rates are accompanied by inflation, look to commodity-based stocks and investments, such as energy companies and gold miner stocks.

DENNIS: In our recent webinar, you remarked that you felt a dividend newsletter might eventually become boring. It became quite the opposite, as staying on top of things, changes in companies, markets, and government impact are constant.

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