Fed's rate hike sparks rally in unlikely group

Published Thu, Dec 17 201512:05 AM EST

The Fed's decision Wednesday to increase interest rates for the first time since June 2006 sparked a rally in an unlikely group of stocks: dividend payers. After the announcement, stocks treasured for their sizable payouts — like utilities, consumer staples and telecom — posted gains greater than 1 percent and ended the day as the S & P 500's biggest winners. In the past, Fed rate hikes took down most of these groups. Some of the best performers in the Dow Jones industrial average were General Electric , Merck , Verizon and Coca-Cola , all names with dividend yields between 3 and 5 percent. Shares of dividend payers, tracked through the iShares Select Dividend ETF , are down 4 percent for 2016 in anticipation of this very Fed moment. But now that the rate hike is done, how can it be that these stocks are leading the market higher? The spike in dividend stocks, according to some market watchers, could be more than just a relief rally. The dovish tone from the Fed's chair, Janet Yellen, signals that rates may remain range bound for a while. Perhaps all that stocks needed was a little clarity on the direction of rates. "Ten and 30-year bond yields actually fell on the Fed's announcement, which tells you that the market doesn't expect overall market rates to rise much in the coming months," Charles Sizemore, principal of Sizemore Capital, wrote in an email to CNBC Pro. Read More Top blogger: Here's your best play for 2016 "This is good for rate-sensitive sectors like utilities and REITs and it tells me that these sectors, which have had a terrible 2015, should start the new year strong," Sizemore predicts. Among the biggest winners Wednesday, the Utilities Select Sector SPDR Fund ( XLU ), rose 2.5 percent, logging its largest daily increase in nine months. The iShares U.S. Telecommunications ETF ( IYZ ) and the Consumer Staples Select Sector SPDR Fund ( XLP ) also performed well, up 2.7 percent and 2 percent, respectively. A recent study from Kensho, a tool designed to quantify historical market events, shows that between the first and second rate hike, most of these groups were down. Among the biggest losers, as shown on the chart above, telecom and consumer staples made the list, down on average more than 2 percent. And although utilities posted an average return of 0.57 percent, those gains fell behind those of other groups like energy and tech, according to Kensho. To be sure, not all investors believe in the longevity of this trade. "Economics 101 tells us dividend payers have lost a significant tail wind in the form of zero rates. History tells us dividend payers tend to lag the overall market for six months following the first Fed rate hike," Chris Ciovacco of Ciovacco Capital Management wrote in an email. Still, that's quite a one-day move for the dividend dogs of the Dow. — CNBC's John Melloy and Tae Kim contributed to this report. Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

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The Fed's decision Wednesday to increase interest rates for the first time since June 2006 sparked a rally in an unlikely group of stocks: dividend payers.

After the announcement, stocks treasured for their sizable payouts — like utilities, consumer staples and telecom — posted gains greater than 1 percent and ended the day as the S&P 500's biggest winners. In the past, Fed rate hikes took down most of these groups.

Some of the best performers in the Dow Jones industrial average were General Electric, Merck, Verizon and Coca-Cola, all names with dividend yields between 3 and 5 percent.

Shares of dividend payers, tracked through the iShares Select Dividend ETF, are down 4 percent for 2016 in anticipation of this very Fed moment. But now that the rate hike is done, how can it be that these stocks are leading the market higher?