Investment Strategy

Taking Advantage of the Market’s Irrational Fears

When we launched Capitalist Times Premium in July 2013, the prospect of rising interest rates had many investors in a panic.

The conventional wisdom held that the Federal Reserve’s plan to scale back quantitative easing and eventually raise the benchmark rates would spark a selloff among dividend-paying stocks.

Critics held that rising interest rates would increase companies’ borrowing costs and erode the value of dividends paid to investors.

We didn’t buy this argument for two reasons:

• By early July 2013, the 10-year Treasury note’s yield had climbed to about 3 percent, pricing in the effects of the Federal Reserve’s plan to normalize monetary policy.
• Unlike bonds, equities don’t pay a fixed coupon; rather, their dividends can grow or diminish over time, depending on the health of the underlying business.

Over the past 22 years, dividend-paying stocks have exhibited little correlation to interest rates. Check out this graph tracking the annual change in the 10-year Treasury note’s yield and the total returns posted by four indexes tracking popular dividend-paying stocks.