Most investment professionals believe the Fed will hold off on raising rates, but if the Fed unveils a surprise hike on Wednesday afternoon, high-yielding stocks could be in big trouble.
A drop in interest rates, which is partially a result of the Federal Reserve's decision not to raise short-term rate targets thus far in 2016, have helped many high-dividend stocks to outperform this year. Yet if rates turn higher, dividend stocks can be expected to lose ground because they will compare less favorably with bonds.
The hardest-hit dividend names may prove to be those that are also trading at above-market valuations since these are the stocks that investors are more likely to be buying for their dividend alone, rather than for the attractiveness of their fundamentals.
When all the stocks in the are sliced and diced in this manner with data provided by FactSet, a few names stick out:
Topmost on the list is Frontier Communications, a communication services stock with a massive dividend yield.
High-dividend stocks "are going to be subject to short-term profit taking if the Fed announces a surprise hike tomorrow or signals they're going to definitely hike in December," Boris Schlossberg of BK Asset Management commented Tuesday on CNBC's "Trading Nation."
More generally, however, Schlossberg thinks the outlook for high-dividend names remains strong.
Given how slowly the Fed is primed to raise rates back to historically normal levels, "the differential between dividend yields and what the 10-year yield is going to be is going to be significant enough that it will attract investors," Schlossberg said.
Translation: Whether the Fed hikes in December or on Wednesday afternoon, there's little risk of bonds offering investors the types of yields they can now receive in high-dividend stocks. And with the 10-year Treasury yield below 1.7 percent on Tuesday afternoon, he appears to have a point.
As of Wednesday morning, traders assign a 15 percent chance of a Fed hike announcement later in the day, according to CME's Fed Watch tool.
Correction: This story was revised to delete Kinder Morgan, Transocean and Williams Cos. and add HCP, CF Industries and Host Hotels for the list of companies whose stocks could be most negatively affected by a surprise rate hike announcement Wednesday by the Federal Reserve. This version uses prior-year figures for the companies' dividend yield. A previous version was based on fiscal-year data, which is not as up to date as prior-year figures.