5 Dividend Stocks That Can Thrive as Rates Rise

Interest rates have been moving upward, and "high-dividend-yield stocks tend to underperform during rate-hike cycles as bonds become increasingly attractive to investors," as Dennis DeBusschere, a leader of the portfolio strategy research team and a member of the investment policy committee at Evercore ISI, wrote recently, as quoted by Barron's. Nonetheless, a large cap sustainable dividend growth portfolio assembled by that firm has outperformed the S&P 500 Index (SPX) on a total return basis, roughly 6% versus 5%, for the year-to-date through June 12, per Barron's. Among the stocks fitting with this strategy that Evercore ISI recommends are:

Source: Barron's, as of the market close on June 19.

Evercore ISI bases its strategy on a combination of dividend yields, dividend payout ratios, and their assessment of the potential for future dividend growth. 

Diminished Importance

Right now, the yield on the 10-Year U.S. Treasury Note is nearly 3%, versus a dividend yield of about 2% for the S&P 500, per Barron's. Moreover, while the overall S&P 500 dividend yield is up since the start of the year, it still is less than half its long-term historical median value. As a result, dividends have become a less important selection criterion for equity investors in recent years, and the highest-paying industry sectors have lagged the broader market. (For more, see also: Why Dividend Stocks Are Losing Their Magic.)

Be Selective

"You have to be a lot more discerning about the types of dividend stocks that you are investing in," as DeBusschere told Barron's. As the T-Note yield rose from 1.36% in July 2016, the proportion of S&P 500 stocks offering a better yield has fallen from 60% to only 25%. Among the latter inevitably will be stocks that are beaten-down in price as the result of poor performance or diminished future earnings prospects. Accordingly, investors should be careful about rushing into troubled stocks, often called value traps, solely on the basis of high current dividend yields.

Other Dividend-Paying Picks

Barron's has produced its own analysis of stocks with long track records of increasing dividends, going back 25 years or more. Such stocks, Barron's argues, represent defensive plays in an uncertain market environment. (For more, see also: 7 Stocks to Beat the Market's Wild Swings.)

Another Barron's report uncovered three dividend-paying stocks that should offer value regardless of economic conditions. (For more, see also: 3 Bargain Stocks With Fast-Growing Dividends.)

These "serial dividend raisers" got an added boost from tax cuts to their ability to increase payouts yet further. (For more, see also: 8 Dividend Payouts That Are Soaring on Tax Cuts.)

BMO Capital Markets has produced its own model portfolio of stocks poised to increase dividends over the long run. (For more, see also: 12 Dividend Stocks for Bull and Bear Markets.)

JPMorgan Chase has found attractive opportunities among bank stocks for dividend-oriented investors. (For more, see also: 10 Banks With Soaring Dividend Payouts.)

Fund manager John Mowrey of Allianz has shared his own selection criteria for dividend-paying stocks, as well as his top picks earlier this year. (For more, see also: 5 Dividend Stocks for Bargain-Hungry Investors.)