The Federal Reserve has not explicitly stated it will hike rates, pushing off its decision to a later time. If the Fed keeps kicking the can down the road, investors may revisit high-dividend-paying stocks and exchange traded funds.
“Remember that a year ago, 75 percent of the Street said we were going to get a hike in June. And in March of this year, the Fed took a dovish turn. … If you take the same playbook from March, then those are the type of things that will do well when the Fed is pushing things out.,” Larry McDonald, head of the U.S. Macro Strategies group at Societe Generale, said on CNBC.
Consequently, with the Fed repeating its stance, a number of market observers are looking back at yield-generating stocks. For instance, Erin Gibbs of S&P Capital IQ recommends “high-dividend-yielding companies, with a focus on utilities and REITs.” Similarly, Dennis Davitt, an options trader with Harvest Volatility Advisors, points to “all dividend plays,” like utilities and staples.
If the Fed holds rates low, sectors that investors use to generate yield will look attractive relative to fixed-income assets, and the high-yield investments will likely outperform.
Income investors can capture the two broad segments of the market through ETFs. For instance, the Utilities Select Sector SPDR (NYSEArca: XLU) has a 3.72% 12-month yield, Vanguard Utilities ETF (NYSEArca: VPU) has a 3.65% 12-month yield and iShares U.S. Utilities ETF (NYSEArca: IDU) has a 3.6% 12-month yield. [ETF Chart of the Day: Utilities Light Up]
The utilities sector has also been outperforming the broader S&P 500 as yields on benchmark 10-year Treasuries dipped to 2.27%. Over the past month, XLU rose 4.0%, IDU gained 3.7% and VPU increased 3.5% while the S&P 500 advanced 2.6%.
Moreover, for broad real estate investment trust exposure, the Vanguard REIT ETF (NYSEArca: VNQ) has a 4.07% 12-month yield, SPDR Dow Jones REIT ETF (NYSEArca: RWR) has a 3.34% 12-month yield and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) has a 3.86% 12-month yield. [REIT ETFs Could Rebound from Here]
Investors can also consider high-yield, mortgage-backed REITs, which are more sensitive to changes in interest rates. The Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) has a 10.49% 12-month yield and the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM) has a 14.29% 12-month yield.
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.