The Lowdown on High-Yield Stocks

When interest rates are creeping higher, it's a dangerous time to own high-yielding stocks. Not all stocks that feature hefty dividends will be affected by the rise in interest rates, but as yields on 10-year Treasury notes reach their highest level in over a year, the shine is coming off of this market niche. The relationship between bonds and high-yield equities revolves around the interest rate differential. Stocks are viewed as risky compared with U.S. Treasuries, so a person holding stocks deserves a reward for taking that risk. When Treasury yields rise, that reward -- a higher yield -- becomes less attractive as the differential between a risky and a presumably risk-free investment becomes narrower. Not surprisingly, some interest-rate-sensitive sectors are looking soft. Take a look at the S&P Select Utilities SPDR Fund (XLU), which has broken down badly out of a head-and-shoulders pattern. The break of the bearish pattern occurs on heavy volume and coincides with the break of XLU's 50-day moving average (blue). XLU is likely to bounce soon, as its 200-day moving average is coming into view (red) but is unlikely to rally above its neckline of $39.50. XLU, Daily TradeStation View Chart » View in New Window » Of course, utilities aren't the only interest-rate-sensitive sector of the market. We're now out of Boston Properties (BXP), a real estate investment trust (REIT) that has performed very well for us since it broke out of a bullish flag pattern. Tuesday's large bearish engulfing candle on BXP swallowed the two previous candles, negating their activity (shaded yellow). We no longer have a position in BXP. BXP, Daily TradeStation View Chart » View in New Window » The softness exemplified by BXP is not restricted to the REIT sector. For example, AT&T (T) yields nearly 5%, and that has helped attract investors to this telecommunications giant. Technically speaking, AT&T is in trouble, falling victim to both a double top pattern (red) and a series of descending triangles (black lines). The key level here is the lower black line of $36; a close below that level would place the stock at a three-month low and result in a break of the stock's 200-day moving average (red). That's not the type of behavior you'd expect to see in a roaring bull market. If stocks turn bearish, T could be hit even harder. T, Daily TradeStation View Chart » View in New Window » Like AT&T, Verizon Communications (VZ) had a great run earlier this year, but now it's in trouble. After breaking a smaller double top pattern and a simultaneous break of its 50-day moving average (blue), Verizon is falling. Verizon currently yields about 4.18%, or about 2% more than a 10-year U.S. Treasury note. Dividend investors may have decided that the extra 2% isn't worth the risk. One point in Verizon's favor is that the break occurs on lighter than average volume. VZ, Daily TradeStation View Chart » View in New Window » Of course, AT&T and Verizon have other concerns as well, but there is certainly a theme of high-yield weakness playing out right now. Meanwhile, other sectors, such as consumer discretionary, are holding up well. That's not a surprising shift as the economy strengthens and interest rates rise.

The Lowdown on High-Yield Stocks

Rising interest rates pose a threat to some widely held dividend-payers.

Columnist Conversation

Monday Morning Fibocall for 7/6/2020

This Weekend on Real Money

Acuity Brands (AYI) Posts Much Better Than Expected Results

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.