Investors who think they've found safety in high-dividend stocks may be in for a rude awakening if the Fed hikes rates this year, according to one trader.
Big dividend payers have been popular, but when "everybody heads for the exit, you can see these stocks really get taken down," Dennis Davitt, chief investment officer of Harvest Volatility Management, said Tuesday on CNBC's "Trading Nation." "That strips any of the benefit from the dividend."
Davitt explained that in a similar fashion to today's low interest rate environment, the tide could quickly turn for high-dividend stocks.
"One of the things about high-dividend-paying stocks is that people look at them as a 'safe trade' or a low volatility place to put money," said Davitt. "You're gathering yield from the dividend, similar to a bondlike yield at 2.5 to 3 percent," but like bonds, dividend stocks could fall dramatically once the Federal Reserve raises interest rates.
For those taking a total return perspective to their investments — considering price changes in addition to dividend payouts — that could be a fatal blow.
In addition, the scramble for safety and yield have led stocks like Coca-Cola to trade at markedly high valuations.
You have to wonder, "where is the growth with that P/E going to come from?" Davitt asked rhetorically.
But some say that despite the potential risks, big dividend payers could look attractive.
Mark Tepper, president of Strategic Wealth Partners, grants that many dividend names are "carrying valuations above their long-term averages."
Still, he contends that "everything is overbought" — and in such an environment, dividend payers may be relatively more attractive.
"If you're getting into dividend-paying stocks for the purpose of capital appreciation, I think you're missing the majority of the point," Tepper said Tuesday on CNBC's "Trading Nation." "Capital appreciation is a byproduct."
He said that when the Fed does hike rates again at some point this year, traders could see jarring pullbacks in the high-dividend payers — but since that is unlikely to disrupt payouts, those who hold onto those stocks will do well by continuing to enjoy the yields.