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Investment Strategy

Taking Advantage of the Market’s Irrational Fears

By Roger S. Conrad, on Oct. 8, 2014

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.

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