High-yield dividend stocks and related exchange traded funds have been underperforming the market on speculation of higher interest rates, but without an immediate Federal Reserve rate hike, the income-generating assets could shine.
According Barclays analysts led by Jonathan Glionna, utilities, master limited partnerships and real estate investment trusts deserve a second look as the markets may not see a substantial rise in rates in the near-term due to overseas factors, such as the sudden devaluation in the Chinese yuan, reports Julie Verhage for Bloomberg.
Income investors can capture these broad segments of the market through ETFs. For instance, the Utilities Select Sector SPDR (NYSEArca: XLU) has a 3.5% 12-month yield, Vanguard Utilities ETF (NYSEArca: VPU) has a 3.45% 12-month yield and iShares U.S. Utilities ETF (NYSEArca: IDU) has a 3.4% 12-month yield. [Yield-Generating ETFs To Play If The Fed Stands Pat]
For broad real estate investment trust exposure, the Vanguard REIT ETF (NYSEArca: VNQ) has a 3.86% 12-month yield, SPDR Dow Jones REIT ETF (NYSEArca: RWR) has a 3.15% 12-month yield and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) has a 3.69% 12-month yield.
Moreover, the largest MLP-related options include the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), which has a 6.08% 12-month yield, and Alerian MLP ETF (NYSEArca: AMLP), which has a 7.54% 12-month yield.
However, utilities, MLPs and REITs are more sensitive to changes in interest rates as investors would rather have safer government Treasuries as rates rise.
Barclays, though, argues that the risks are management, even if rates rise, and the relationship between rates and performance in the areas is not as strong as some would believe. The analysts pointed to four periods when interest rates rose by at least 100 basis points in six months. For instance, in 2003, REITs and MLPs both jumped 10% while utilities fell behind. In 2009, MLPs surged 40% in six months. During 2010 and 2011, REITS were the the best performers, and MLPs were not too far behind. Lastly, during the taper tantrum of 2013, MLPS were slightly up while utilities remained flat and REITs dipped.
Looking at the data, Barclays concluded that utilities are more stable, MLPs perform well and REITs are inconsistent during periods of rising rates.
For more information on dividend stocks, visit our dividend ETFs category.
Full disclosure: Tom Lydon’s clients own shares of XLU and AMJ.
Max Chen contributed to this article.