Dividend Paying Stocks and Interest Rate Risk
Yield-hungry investors have increasingly gravitated to the almost irresistible pull of high dividend paying stocks for income. But chasing those high yields can come with unintended exposure to interest rate risk that could hurt performance. Is there a better place to look for that income?
Dividend growth strategies focus on stocks that consistently grow their dividends over time instead of those that just pay high dividends. These strategies offer a potentially all-weather dividend solution capable of performing well regardless of the direction of interest rates.
Looking Abroad for Increased Income and Reduced Rate Exposure
If you’re looking for dividend income, a prudent path to higher yields may lie outside of the United States. Stocks in Europe and in international developed markets often have higher yields than those in the United States. That means it’s possible to pursue the advantages of a dividend growth strategy and relatively high dividend yields, as reflected by the MSCI Dividend Masters indexes shown below. Plus, international dividend growth stocks come without the added U.S. interest rate sensitivity of high dividend paying domestic stocks, such as those included in the Dow Jones US Select Dividend Index.
Boosted Income Potential Abroad
(International Dividend Growth vs. U.S. High Dividend Payer Indexes)
(Source: Bloomberg as of December 31, 2015. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.)
A Greater Diversity of Holdings Is Key
Stocks in the utilities sector represent a key source of interest rate risk in U.S.-based high dividend investing strategies. For example, a high dividend yielding index like the Dow Jones U.S. Select Dividend Index has a whopping 34% of its weight in the utilities sector. International dividend growth indexes, however, such as the MSCI EAFE Dividend Masters Index and the MSCI Europe Dividend Masters Index, have modest 9% and 6% respective weightings to utilities. Because their yields are generally less reliant on rate sensitive sectors, these strategies carry significantly less interest rate risk.
And perhaps more importantly, like their U.S. counterparts, international stocks that have grown their dividends have outperformed those that haven’t.
MSCI EAFE: Dividend Growers Outperformed
June 30, 1996-December 31, 2015
(Source: Ned Davis Research analysis reflecting the performance of groups of companies underlying the MSCI EAFE from 6/30/1996–12/31/15. Growth of a hypothetical $100 in MSCI EAFE, which represents developed markets outside of North America, including Europe, Australasia, and the Far East. MSCI EAFE components include: Dividend Growers: companies that increased their dividend during the previous 12 months and a subset of Dividend Payers; Dividend Payers: companies that paid a quarterly or annual dividend in the calendar year and includes Dividend Growers, Dividend Cutters, and Dividend Non-Changers; Dividend Non-Payers; and Dividend Cutters. Assumes dividends reinvested and all are equally weighted.)
Whether you want a prudent path to higher yields, or you’re looking for a solid European or international developed equity allocation strategy, going global with dividend growth is a compelling alternative for income investors.
Visit ProShares.com to learn more about the appeal dividend growth strategies. This article and additional reports on dividend growth investing are available in the Resources section.
This information is not meant to be investment advice. Investing involves risk, including the possible loss of principal. International investments may involve risks from: geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and from economic or political instability. Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing. Obtain them from your financial advisor or broker-dealer representative, or visit ProShares.com. ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds’ advisor or sponsor.