Interest Rates Rising: Do You Own the Right Stocks?

Federal Reserve officials have divined that easy money should be somewhat less easy.
The Fed began to raise interest rates in Dec. 2016. The Fed will continue to raise interest rates over the next year.
The prospect of rising interest rates haest rates portend.
Rising interest rates are frequently a byproduct of rising economic growth. That’s an obvious good, but it’s a good that’s encumbered with a few “bads” for some companies.
Higher debt cost is a primary “bad.” Rising debt costs can jeopardize the dividend, as Anheuser-Busch InBev (NYSE: BUD) shareholders learned this week.
Fortunately, the good supersedes the bad in the grand scheme of a vast, integrated economy.
Economic growth is an obvious good for the overall stock market. But again, we must consider heterogeneity. Not everyone will benefit. Some stocks will outperform; others will still perform, but not as well.
Many technology stocks will persevere. Tech companies tend to carry low debt loads and a stable fixed-capital structure. This paradigm frequently leads to widening margins when sales accelerate. It also leads to rising dividends.
Tech stocks have historically been the best-performing sector in the six months after interest rates begin to rise, according to data analyzed by JPMorgan and Birinyi Associates. Not so coincidentally, many tech companies are prominent dividend growers.
Banking is another dividend-centric sector expected to generate winners in an environment of rising rates . But again, we’re not playing children’s league soccer. Not everyone wins.
If long-term rates rise and short-term rates remain near zero, banks that lend long (mortgage lending, for example) and borrow short will benefit. But if short-term rates rise with long-term rates, banks with balance sheets festooned with assets sensitive to short-term rates – home-equity loans, credit cards, working-capital lines of credit – could be left in the dust.
Dividend growers might be the surest bet of all. These stocks have historically outperformed in the wake of rising rates. According to data compiled by Ned Davis Research, three years after the Fed first hikes the federal funds rate, dividend growers have outperformed dividend nonpayers by over 17 percentage points.
As for laggards, keep an eye on sectors marked by high debt.
Master limited partnerships  (MLPs) carry high debt and could suffer if they need to refinance in a higher-rate environment. Investors also need to keep an eye on their REIT investments, particularly if they own mortgage REITs, which are heavily leveraged and carry interest-rate-sensitive debt.
Again, we have to consider heterogeneity. Many REITs will thrive as interest rates rise.
One investment firm reports that since 1979 there have been six periods of monetary tightening and rising U.S. Treasury yields. When U.S. Treasury yields are rising (as is happening now), REITs delivered average annual returns of 10.8%. In periods when the Fed was actually increasing interest rates, they performed even better with a 12.6% average annual gain.
Where do I find the stocks capable of thriving in an environment of rising interest rates? Glad you asked.
Allow me to direct you to the High Yield Wealth portfolio of recommendations. The portfolio is composed of dividend growers, business development companies, tech stocks – all of which conventional wisdom expects to outperform when rates rise. It also holds equity REITs, which the data show can also outperform.
We recommend the right stocks. We believe that we’re right because most of our recommendations are proven stocks for all seasons.