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Philip van Doorn

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June 23, 2019, 9:21 p.m. EDT

Dividend stocks, hot this year, may get even hotter thanks to the Federal Reserve

Lower interest rates mean rising prices for higher-yielding stocks

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By Philip van Doorn, MarketWatch


Bloomberg
Shares of Phillips 66 have a dividend yield that exceeds 4%.

Dividend stocks, which have performed well this year, may get another boost if the Federal Reserve cuts interest rates.

With lower rates, income-seeking investors could use dividend stocks more than ever, and growth investors may also be interested because declining low interest rates prop up prices of higher-yielding stocks.

The S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.39%  has risen 15.3% this year, driven in part by the change in Federal Reserve policy in March — there was high confidence the policy-setting Federal Open Market Committee would begin to lower interest rates as early as Wednesday. This didn’t happen, however, the FOMC made changes to the language of its policy statement that appeared to increase the likelihood of a lower of the target for the federal funds rate later this year.

Investors have already anticipated rate cuts by pushing yields on U.S. Treasury paper lower across the board, and we now have an inverse yield curve, with yields on three- and /zigman2/quotes/211347046/realtime BX:TMUBMUSD03M 0.00%  six-month Treasury bills /zigman2/quotes/211347049/realtime BX:TMUBMUSD06M 0.00%  higher than the yield on 10-year notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% .

Here’s the complete text of the FOMC statement.

More coverage of the Fed:

• Here’s how often the Powell-led Fed disappointed stock-market bulls on decision day

• History suggests Fed can’t make ‘insurance cuts’ to keep expansion alive

The inverse yield curve has traditionally been considered an indicator of a coming recession. Then again, Mark Grant, the chief global strategist for fixed income at B. Riley, said in his “Out of the Box” email on June 12 that he believed the rate inversion reflects “merely that the Fed, to date, has not bought Treasury bills and so the 800-pound gorilla has not yet entered that room. I expect them in shortly, however.”

European Central Bank President Mario Draghi added fuel to the fire Tuesday, saying eurozone economic indicators were “tilted to the downside” and that “additional stimulus will be required” if the numbers don’t improve.

Anticipation of renewed stimulus by the Fed has led to good performance among three of the four stock sectors of the S&P 500 with weighted aggregate dividend yields above 2.5%. Here are the 11 sectors sorted by dividend yield, showing their weighed aggregate price changes this year and last year:

S&P 500 sector Current dividend yield Price change - 2019 through June 17 Price change - 2018
Energy 3.79% 6.5% -20.5%
Utilities 3.27% 13.5% 0.5%
Real Estate 3.17% 22.1% -5.6%
Consumer Staples 2.87% 15.3% -11.2%
Financials 2.14% 12.7% -14.7%
Materials 2.11% 12.9% -16.4%
Industrials 1.98% 16.4% -15.0%
Health Care 1.80% 5.6% 4.7%
Information Technology 1.52% 22.5% -1.6%
Communications Services 1.41% 17.4% -16.4%
Consumer Discretionary 1.34% 19.9% -0.5%
 
S&P 500 Index 1.99% 15.3% -6.2%

Leaving aside the energy sector, which is tied to the vagaries of oil and natural gas prices, the utilities, real-estate and consumer-staples sectors have performed well this year, especially when considering that most of the companies in those sectors aren’t considered dynamic, rapidly growing innovators.

It is remarkable to see a 22% increase for the real-estate sector in 2019, excluding dividends, even after it outperformed, slightly, the full S&P 500 in 2018.

/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
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Volume: 1.99B
Oct. 18, 2019 5:08p
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Oct. 18, 2019 5:00p
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/zigman2/quotes/211347049/realtime
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BX : Tullet Prebon
1.63
0.00 0.00%
Volume: 0.00
Oct. 18, 2019 5:00p
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/zigman2/quotes/211347051/realtime
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BX : Tullet Prebon
1.75
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Oct. 18, 2019 4:59p
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