Hi I'm Jared Hoff, Portfolio Manager at Federated Investors.
How are dividend stocks affected by interest rate fluctuations?
The question about interest rates I think provides a good example of how investors can benefit over the long run by focusing on businesses rather than stocks. But it's certainly true, as we think about stock prices as interest rates rise and fall in the short term, some dividend stocks react like bonds. We see this especially in the real estate sector, in regulated utilities, and in telecom shares which tend to perk up when rates decline, and then they tend to under perform in the early innings of a period of rising rates.
By and large though these share price reactions have been somewhat knee-jerk in nature, and longer term performance of these dividend rich stocks has been pretty independent of short-term rate movements. Looking beyond those short-term share price movements I think what's more important for dividend investors is to focus on the quality of the underlying business, and its ability to fund business activities in all kinds of interest rate and credit environments through the cycle. And of course they should focus on the durability of the balance sheet and cash flow to support a high and rising dividend stream.
What role do dividends play in a persistent low-rate environment?
Regarding the persistent low-rate environment that we've been in, I think what's important to note is that it's happening in a setting where there is a secular rising demand for income. We have an aging population in the US, and people are turning 65 and entering retirement at a faster pace. And the great news is, as healthcare improves, retirees can now expect to live longer more active lives. But as those demographic trends accelerate, so does the need for income, and the traditional sources of income in retirement that served investors for decades, high quality bonds, CDS, savings accounts. They no longer offer as compelling a cash flow stream as they have in the past, and there's a scarcity of income.
But the good news is that hiding in plain sight is a strong source of income that's been rising over time. And I'm referring to the dividend stock universe. Right now there are whole host of high quality companies whose stocks are providing an income stream that's more attractive than a lot of high quality bonds. Plus, dividend stocks can provide something that most bonds can never give us, and that's a source of rising income through dividend growth. And that can help retirees address their rising expenses over the years.
Views are as of 10/21/19, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. There are no guarantees that dividend paying stocks will continue to pay dividends. In addition, dividend paying stocks may not experience the same capital appreciation potential as non-dividend paying stocks. Stocks are subject to risk and fluctuate in value. Principal loss is possible. Stocks offer higher return potential, but their prices are more volatile than those of bonds. Unlike stocks, bank savings accounts and CDs are FDIC insured and offer stable principal. Federated Equity Management Company of Pennsylvania 19-30142 (10/19)