Historically, interest rate hikes have negatively affected dividend stocks, especially high yielders. People see stocks as a high-risk alternative to receiving income. If they could get the same income from interest via savings accounts, GICs, and even bonds, they would. Traditional finance translates high volatility to high risk, and since stocks have the highest volatility of the bunch, they are viewed as high risk.
The interest rate reported by the Bank of Canada has been in a downtrend for the past 25 years. During that time, it hit a high of 16% in 1991 and a low of 0.25% in 2009.
Still, there were ups and downs in between, and no one knows where it’s going next. However, it’s sitting at the low end at 0.75%, so some people believe there is a higher chance of it going up than down. If investors are worried the interest rate will go up, what kind of stocks should they avoid?
1. High-yielding REITs
Real estate investment trusts give investors a convenient and liquid way to invest in real estate and receive rent. However, some REITs pay high yields over 8%, 1% higher than the historical returns of the market.
When interest rate rises, these high-yielding REITs are the ones that will be most affected.
All of these REITs pay a yield north of 8%: Dream Office REIT (TSX:D.UN), Dream Global REIT (TSX:DRG.UN), and Northwest Healthcare Properties REIT (TSX:NWH.UN) pay yields of about 8.7%, 8.1%, and 9.5%, respectively.
2. High-yielding oil companies
It pays out a monthly dividend equating to an annual yield of 9.7%. Before its price drop, it only yielded around 6.5%. Some shareholders of Crescent Point must be in it for the high yield, or even the 5% discount of dividend reinvestments. If interest rates were to rise, Crescent Point would most likely take a hit.
If you’re worried about interest rate hikes affecting your dividend stocks negatively, you can consider avoiding high-yielding stocks similar to the ones mentioned in this article.
However, in reality it is unlikely that interest rate hikes, when they do occur, will be big moves. After all, the big guys don’t want to shake up the economy. On top of that, if you have been maintaining a balanced and diversified portfolio, you should sit back and let your portfolio do what it does best in the long term: steadily go up.
A diversified income portfolio comprises of stocks from different sectors and industries (hopefully, you’ll start with ones that are generally stable). They include high yielders that pay you an income of 5%+ with slow growth, moderate yielders that pay you an income of 3-4% with moderate earnings growth of 5-7%, and the rest are low yielders that pay you an income of 1-2% with earnings growth of 10% or higher.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kay Ng owns units of Dream Office, Dream Global, and Northwest Healthcare, and shares of Crescent Point.