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 S&P 500, 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: