×

If the Fed shocks the market, these stocks could get crushed

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 S&P 500 are sliced and diced in this manner with data provided by FactSet, a few names stick out:

Ticker
Company
Dividend Yield
Forward P/E
FTR Frontier Comm. 10.0% (Profits not anticipated)
HCP HCP 6.1% 23.2
IRM Iron Mountain 5.3% 30.3
OKE ONEOK 5.2% 26.5
CF CF Industries 5.2% 20.0
HST Host Hotels & Resorts 5.0% 20.5

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.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect