These are not the best of times for investors seeking dividends. "Rising interest rates are an especially strong headwind against dividend stocks and by extension, dividend ETFs," said Jason Browne, the chief investment officer of FundX Investment Group. "In fact, all dividend ETFs are deep in the sells -- and we actually haven't owned them for quite some time as growth funds have been much better performing."
According to Browne, the most interest-rate sensitive (and therefore the weakest performers lately) are those funds focused on the highest-yielding dividend stocks. These include iShares Core High Dividend ETF (HDV) and iShares Select Dividend ETF (DVY) -- and are among FundX's lowest ranked sells.
"These funds offer a yield that is about 1% higher than the market and in line with the U.S 10-year Treasury, but as followers of market leadership, we won't buy them until they show better performance relative to other funds with similar risk," he said.
The better option for those seeking dividends? Dividend growth-oriented funds and ETFs are doing better.
In the FundX universe, the Vanguard Dividend Appreciation ETF (VIG) is rated a hold and has done much better than the dividend ETFs mentioned above. "Ironically, the 1.86% yield of VIG is lower than the 2.05% SPDR DJIA (DIA) , which is rated as a buy," he said. "If you are looking for quality, large-cap stocks and don't mind that the focus isn't on dividends, we own DIA and would continue to buy it."
Are We Out of the Woods Yet?
So how concerned should we be about rising interest rates at this point?
Well, according to a recent report by John Lynch, the chief investment strategist for LPL Financial, when rates are relatively low, rising rates usually indicate improving growth.
"At higher interest rate levels, rising interest rates have tended to spook stock investors as the Federal Reserve gets more aggressive and borrowing costs rise."
So, with the 10-year yield not having eclipsed 3% during this latest bond market selloff, Lynch thinks we have a way to go before the level of interest rates impairs economic activity or the stock market.
This figure illustrates how stocks and rates have historically moved together at low interest rates levels; correlations between the S&P 500 and interest rates have been positive when the 10-year Treasury has been below 5%, as it is today. History also suggests stocks valuations are reasonable for current inflation levels.
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