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Portfolio Update

Return of the Taper Trade

By Roger S. Conrad, on Dec. 18, 2013

Equally important, dividend-paying stocks are not bond substitutes. And like all equities, income-oriented fare responds well to stronger economic growth and poorly to recessions.

And you don’t have to take our word for it. Check out this graph tracking the annual change in the yield on 10-year US Treasury notes and the total returns generated by a range of dividend-paying industries and security classes.

Over the 21 years covered in our graph, the benchmark yield has declined on 12 occasions and increased in nine instances. When the yield on 10-year US Treasury notes increased on a year-over-year basis, all the equity indexes in our study posted a gain in six instances.

Only in 1994 did all four stock indexes decline in value when the yield on 10-year US government bonds declined. And that year was marked by fears that deregulation would destabilize the utility and telecommunications sectors.

Yields on 10-year US Treasury notes plummeted in 2008, but a severe contraction in the US economy sent shares of dividend-paying companies spiraling lower.

This year has ushered in the second-largest increase in Treasury yields in 21 years. Nevertheless, all four equity indexes included in our studies have generated a positive year-to-date return.

Bottom Line: These dividend-paying stocks haven’t tracked interest rates over the past 21 years. Instead, the health of the economy appears to be a much more meaningful driver for these stocks.

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