Published Wed, 11 Jan 2017 13:15:51 -0500 on Seeking Alpha
Factor tilts have resulted in divergent dividend strategy performance following the November elections
By Nick Kalivas, Senior Equity Product Strategist
November's US elections have buoyed investor optimism about the potential for tax reform, increased infrastructure spending, reduced regulation and accelerating economic growth. These expectations led to a 0.75% spike in the 10-year Treasury yield between Nov. 8 and Dec. 16, and a 5.2% increase in the US dollar, as measured by the US Dollar Index.1
Still, by historical standards, interest rates remain low. Nearly a decade ago, the 10-year Treasury yield finished 2007 at 4.02%; it now stands near 2.50%.1 When adjusted for inflation, even the 0.75% bump in the 10-year Treasury yield amounts to a modest 0.40% increase. Compare that with the average annual real (inflation-adjusted) increase in the 10-year Treasury yield between January 1962 and November 2016 of 2.40%.1
Shouldn't dividend stocks be underperforming?
Global demand for dividend-paying exchange-traded funds (ETFs) is strong, as evidenced by robust flows of over $20 billion in 2016; US-based ETFs accounted for more than half of that amount.1 The appeal of dividend-paying stocks is clear, as dividends can help provide a nice offset to rising inflation, while most fixed-coupon debt cannot hedge against rising prices.
Nonetheless, the timing of recent gains is counterintuitive; typically, rising interest rates cause dividend-paying shares to lag.... Read more