Dividend stocks fall as Treasury yields rise, pressuring retirement income portfolios
Rising Treasury yields have weighed on dividend-focused sectors and funds, forcing income investors to weigh yield against business quality.
By Theo Nakamura · Staff Writer
· 3 min read
Dividend stocks and bond yields have moved sharply in opposite directions as rising Treasury yields pressure shares used by many older investors for income. CNBC reported that the shift has hit real estate, utilities and materials, leaving retirees who use dividend funds as part of their portfolios with lower share values even though a stock-price drop does not automatically reduce a company’s dividend payment.
The key comparison is relative income and risk. CNBC reported that higher bond yields have made dividend-stock yields less appealing on a risk-adjusted basis, particularly in sectors known for slower growth and regular payouts. That does not establish that dividends will fall, but it can change how investors value the shares that pay them.
Why are higher Treasury yields hurting dividend stocks?
When yields rise, investors can receive more income from newly issued bonds. That can make dividend-paying equities less competitive, especially where companies have significant debt or limited prospects for earnings growth. Timothy Chubb, chief investment officer at Girard, a Univest Wealth Division, told CNBC that higher leverage can increase a company’s financing risk when interest rates rise.
Chubb said investors assessing a dividend payer should examine whether its business is growing, whether it can increase payouts faster than inflation, and whether dividends come from company cash flow rather than borrowing. Higher advertised yields can also signal greater debt or a greater chance of a future dividend cut, he said.
For bondholders, higher yields can also mean price risk. TreasuryDirect says Treasury notes mature in two to 10 years and bonds in 20 or 30 years, with both paying interest every six months. Their market prices can sit above or below face value depending on the relationship between yield to maturity and the stated interest rate. TreasuryDirect says a yield to maturity above that interest rate corresponds to a price below par.
Dividend funds show different levels of rate sensitivity
The recent results of two dividend exchange-traded funds illustrate how portfolio construction can matter. CNBC reported that the Invesco S&P 500 High Dividend Low Volatility ETF, known as SPHD, lost 7.59% over one month but remained up about 4% for the year to date. According to Invesco data through Sept. 30 cited by CNBC, real estate represented 20% of the fund, followed by consumer staples at 18.5% and utilities at 14%.
Vanguard High Dividend Yield Index ETF, or VYM, declined 3.85% over one month and was up about 11% year to date, CNBC reported. Vanguard data as of Aug. 31 listed financials, industrials and technology as its largest sectors, though CNBC said Vanguard had not released a newer portfolio disclosure.
CNBC reported that funds designed to target the highest yields, particularly those concentrated in slow-growth areas such as utilities and consumer staples, may be more exposed when rates move higher. Dividend-growth funds use a different approach by looking for companies that can raise payouts over time, though that distinction is not a guarantee of performance.
What should retirement-income investors watch?
Chubb cautioned against selling a high-quality dividend payer at a depressed price solely to pursue a higher yield elsewhere in the stock market. He argued that earnings growth and a sustainable payout deserve more weight than a high yield from a business in decline.
Dividend stocks remain only one component of a diversified portfolio, CNBC reported. Neither share prices nor dividends are guaranteed, and the available reporting does not establish a suitable mix of bonds and stocks, or a specific action, for any individual retiree.
This story draws on original reporting from CNBC.
