Portfolio Update

Don’t Sweat the Latest Taper Tantrum

After bottoming at 1.65 percent on Jan. 30, 2015, the yield on the 10-year Treasury note has climbed to almost 2.5 percent, reflecting the consensus expectation that the Federal Reserve will increase the benchmark interest rate sooner rather than later.

This market action triggered a selloff in many dividend-paying equities, as investors heed the conventional wisdom that rising interest rates erode the value of future dividends—a sophistic argument that treats these stocks like fixed-income securities.

(Click graph to enlarge.)

Many of the dividend-paying stocks that have pulled back the most yield 3 percent to 4 percent. Although some commentators have asserted that equities with yields in this range vie with bonds for investment dollars, stocks that fall into this category usually trade at a premium to their peers, often because of their superior rate of dividend growth.

Rather, this pullback reflects investors using the hullaballoo about interest rates as an excuse to take some profits off the table. And with the exception of equities that offer zero dividend growth, these stocks aren’t bond substitutes for any time frame longer than a month.

Nevertheless, many investors rightly ask whether they’re better off selling their dividend payers now and buying them back at lower prices.