The Globe and Mail reports in its Saturday edition that you have heard it a million times: When interest rates rise, dividend stocks drop. The Globe's John Heinzl writes that when rates rise, companies that carry a lot of debt -- including classic dividend payers such as utilities, pipelines and the telcos -- face higher borrowing costs.
Also, as bond yields rise, yields on dividend stocks would also be expected to rise to remain competitive. Brian Belski, chief investment strategist with BMO Capital Markets, has come to a different conclusion after examining 30 years' worth of data: Even as some dividend stocks struggle when rates are rising, companies that regularly raise their dividends have historically outperformed the market during such periods.
In a research note, Mr. Belski analyzed the seven periods since 1990 when the 10-year U.S. Treasury yield rose for a year or longer. In all but two of those instances, dividend growth stocks posted total returns greater than the S&P 500 index. The average annualized total return for the dividend growers when rates were rising was 20.7 per cent, compared with 17.5 per cent for the index. "Rising rates are not a dividend-growth-stock killer," Mr. Belski concluded.
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