If bond yields keep rising, investors may want to shy away from stocks that are prized for their standout dividend payments.
On Wednesday, after a report showing strong employment growth increased economic optimism and solidified the belief that the Federal Reserve would raise rates next week, Treasury bond yields increased sharply. This, in turn, sent stocks with high dividend yields sinking.
High-yielding stocks often move alongside bond prices, and thus inversely to yields, leading some to label them "bond proxies." The thinking is that as bond yields rise, the money that can be made in high-dividend stocks becomes that much less enticing. While some have argued that this represents a massive case of erroneous group-think, it nonetheless seems to describe how markets act.
With this in mind, not every high-yielding stock is likely to get hit hard. Among the highest-dividend names in the , some have markedly low valuations, suggesting that growing optimism around the companies could send them higher even in a rising-yield environment.
To isolate those stocks we can expect to be highly prized for their dividends, all of the stocks in the S&P 500 were narrowed down to those with above-market price-to-earnings valuations; once thus sorted, only four stocks with dividend yields above 5 percent remained:
Unsurprisingly, three of the names are real estate investment trusts, which pay out the vast majority of their income as part of a tax efficiency scheme. The final one, Frontier Communications, is a rural-focused telecom company that has seen its share price more than halved in the past year, and has slid more than 25 percent in the past month, thanks in part to disappointing earnings reported for the fourth quarter.
When asked about these four stocks, Boris Schlossberg of BK Asset Management commented Wednesday: "The fact that they have high dividends and high valuation puts them in the danger zone for me."
This is because he sees rates rising as the Fed increases its short-term yield targets in order to tamp down on potential inflation.
As rates rose on Wednesday, all four of the stocks fell by more than 2 percent.