Bond yields are perking up and while that doesn’t necessarily mean dividend stocks will be negatively affected, it is a reminder for advisors to be selective with dividend payers.
The Global Dividend Model Portfolio, which is part of WisdomTree’s Modern Alpha series of model portfolios, accomplishes that objective.
“This model portfolio seeks to provide capital appreciation and high current dividend income, through a globally diversified set of WisdomTree’s dividend income oriented equity ETFs. The model strives to deliver dividend income in excess of the global benchmark of equities,” according to WisdomTree.
Dividends are in demand as fixed income investors face a lower-for-longer interest rate environment. The Federal Reserve is expected to maintain its near-zero interest rate policy to help push inflation up, bolster the economy, and lower the unemployment rate. The Fed has already stated it is willing to let inflation run higher to offset years inflation fell below its 2% target.
“With bond yields ticking up recently, dividend stocks could see more competition for investors’ capital. But that doesn’t mean all payers face the same obstacles,” reports Lawrence Strauss for Barron’s.
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The WisdomTree model portfolio emphasizes quality and dividend sustainability, traits that are meaningful in any climate. Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses.
“Dividend-growth stocks with lower payout ratios are better suited to absorb rising rates. Broadly speaking, that includes industrials, financials, as well as certain technology and consumer-discretionary companies,” adds Barron’s.
Dividend-paying stocks can also help insulate investors from a broad market pullback. That’s particularly true of this model portfolio’s components, which by virtue of their quality traits, tend to display less volatility in rough markets.
Dividend growth is also meaningful today because payout growers typically weather rising rates. That’s something to consider with Treasury yields climbing.
“Lately, the 10-year Treasury’s yield has been rising off of ultralow levels, but it remains low by historical standards. It was recently at 1.14%, up from around 0.5% in August, as investors—many of whom are encouraged about the economic outlook—sell those bonds. Bond prices and yields move in opposite directions,” concludes Barron’s.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.