As bond yields have fallen in the low interest rate environment, some investors have sought out returns in stocks that pay out high dividends. According to one trader, if the Federal Reserve moves a rate hike back, these high-yield stocks are going even higher.
"As the Fed has pushed out the rate hike expectations, the higher-yielding stocks have been doing very, very well," Larry McDonald, managing director of Societe Generale, said Wednesday on "Trading Nation."
The Vanguard High Dividend Yield ETF (VYM), which tracks high dividend-yield stocks, fell Wednesday ahead of the Fed minutes release, but pared some losses after the report showed that most officials do not yet see economic conditions fit for a rate rise. The central bank has discussed raising rates as early as September.
The U.S. 10-year Treasury note yield fell to 2.12 percent on Wednesday from 2.19 percent. The VYM ETF closed down less than 1 percent.
McDonald said international pressure from slowing economies in Canada, China and Japan, as well as a large amount of corporate and sovereign debt, will keep interest rates low. He said if the Fed does hike rates this year, it will have to raise them very slowly.
"If the global economy's slowing, that presents an opportunity for high yield-paying stocks here in the United States," he said.
But buying high-yield stocks via the VYM fund could be a risky move, according to Todd Gordon of TradingAnalysis.com.
VYM has performed worse than the this year, losing almost 2 percent while the S&P has gained 1 percent. Gordon said the fund has been dragged down by its two largest holdings, Microsoft and Exxon Mobil. The tech giant fell 1.4 percent Wednesday, but is up 0.3 percent for the year. Exxon Mobil is down more than 17 percent year to date.
Because of these particularly large holdings, VYM is very susceptible to losses should the market crash, he said on "Trading Nation."
"This doesn't happen to be the one you want to look toward," Gordon said. "Should the stock market break down, this is going to be one of the first that comes after."
Of VYM's 10 largest stock holdings, six are up year to date.