Should the Fed rate hike hold your interest?

Mar 17, 2017 Investing Strategies

It’s finally happened. The long-awaited fed rate hike is now in our rearview mirror, even if only by a couple days.

Is this the beginning of a new normal, where fluctuations in the interest-rate environment spell hard times for income investors?

Not quite yet.

Last year, there was some expectation of a fed rate hike, if not in November, then surely in December.

In October 2016, I had already noted that long-term interest rates were on a steady march higher. I expected the trend would increase pressure on income investors.

Back then, the 10-year Treasury note had risen from below 1.40% in July to nearly 1.80% – a 30% leap for those of you keeping score.

Since then, it’s jumped another 38% to over 2.50%!

Federal Rate Hike

I wrote at the time that surpassing the 2.00% mark could signal a move higher. And that’s exactly what’s happening. Just recently, the yield on the 10-year T-note triggered an SSI Entry signal.

As a result, many interest-sensitive stocks have suffered, including REITs which are down 10% from their highs in 2016.

A case in point, the Vanguard REIT ETF (VNQ):

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Some popular closed-end funds, like the Invesco Value Municipal Income Trust (IIM) have suffered even greater declines. IIM is now down 20% from its July high.

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So, where should income investors look?

Here’s a surprising answer…. utility stocks.

Utility stocks are normally seen as being interest-sensitive. However, the prospect of a stronger economy has moved utilities higher and the Utilities Select Sector SPDR Fund (XLU) just triggered a new SSI Entry signal in the past 2 weeks.

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With a yield of close to 2.9%, and a VQ just above 12%, the utilities could be a better alternative than some of the more traditional income-generating investments.

Utilities aren’t the only place to look, though.

Another area that has performed well are stocks in companies that have a track record of increasing their dividends. Vanguard’s Dividend Appreciation ETF (VIG) invests in stocks like these.

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As I recently wrote here, I expect Treasury prices are nearing the bottom and will begin to move higher. But even if they move lower and the yields on the 10-year T-note rise to the 3% range, that should not be enough to derail these stocks.

The media in their hunger for eyeballs and clicks will be focused on Janet Yellen and the Fed, but keep your eye on the yield of the 10-year T-note. That’s the real story.

To looking past the short term,

Richard_Signature
Richard Smith, PhD
CEO & Founder, TradeStops

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