EC Here Comes “The Fed Is Meeting!” Folly, Right On Schedule

If the past is prologue to the future, a 0.25% rate increase will send thousands of issues tumbling 3, 4, 5% and more.  Is it possible the portfolios of the income stocks and mutual funds (ETF, CEF or open-end) you own will be yielding 3, 4 or 5% less the day or month after the rate rise?  Unlikely.  Yet this knee-jerk reaction strikes every time we are within a week of the Fed meeting.  I know this because our profitable investments in this arena are now executing as our trailing-stop prices are reached.

“Weird,” you say.  “But how does that make me any money?”  Here’s how…

The selloff is overdone not only numerically but also “geographically.”’ That is, stocks in almost every sector are punished simply because they pay a good dividend.  This makes no sense.  Many dividend-paying companies, most notable for their yield, do better when rates are higher, not worse -- yet their stocks will sell off, too.

Nowhere is this more in evidence than among the best-quality utilities and REITs.  We currently own just one utility, Madison Gas & Electric, now called MGE Energy (MGEE) and I don’t recommend it today.  (I bought it as a growth utility when it was $21.13 a share; it’s now above $60 and has been paying me better than 5% a year ever since.  For some positions, especially those in our asset classes that are designed for good ballast, you really can hold forever.)

This boring utility held like a rock through the 2007-2009 decline

We own more REITs, however, and if the usual reaction to a Fed rise holds, we will soon own more.  If you are in any business that rents property (very often whether you know it or not from a publicly-traded REIT or one of their subsidiaries) one thing is certain besides death and taxes: your rents will go up when your lease is up for renewal.  The same holds true if you rent your apartment. Here’s something else you know: if interest rates are higher, meaning your landlord’s borrowing and other costs have gotten higher, your rents will increase by that factor, as well.

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Disclaimer: I encourage you to do your own due diligence on issues I discuss to see if they might be of value in your own investing. Past performance is no guarantee of future ...

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Chee Hin Teh 4 years ago Member's comment

Thanks for sharing

Farah Kincaid 4 years ago Member's comment

Thanks for the insight into what's behind the #REITs sell-off. Does sound like an opportunity indeed!

Joseph Shaefer 4 years ago Author's comment

At least we don't have to wait long to find out if this plays true again this time...