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Executive Summary

Forget the Fed

By Roger S. Conrad on Mar. 8, 2015

The lowest US unemployment rate in seven years has sparked speculation that the Federal Reserve will raise interest rates sooner than expected, giving traders a convenient excuse to sell dividend-paying stocks.

Arguments can be made for and against the Fed raising interest rates.

On one hand, the federal funds rate continues to hover near zero, and the central bank has long cited 5.5 percent unemployment as a prerequisite for gradually normalizing monetary policy after a period of extraordinary accommodations.

On the other hand, inflationary pressure remains negligible. Hiking interest rates would also propel the Uncle Buck even higher, undermining the nascent revival of US manufacturing and the finances of many developing-world economies.

Misjudging which course of action the Federal Reserve will take won’t ruin your portfolio. However, rashly selling your dividend-paying stocks doesn’t make a lot of sense; future returns for utility stocks, master limited partnerships and telecom stocks won’t depend on the US central bank’s next move.

Dividend-paying stocks were big winners in 2009 and 2013, years when the yield on the 10-year Treasury note climbed by more than 70 percent.

Don’t make the mistake of confusing dividend-paying equities for bonds. Whereas bonds pay a fixed coupon, dividends often increase to reflect growth in the underlying business; these stocks tend to track economic conditions and company- and industry-specific headwinds and tailwinds.

The selloff in utility stocks and other dividend-paying equities shouldn’t come as a surprise, given the long-standing misperception that rising interest rates spell doom for these securities. And after the Dow Jones Utilities Average’s huge run-up in the fourth quarter and the first month of 2015, investors needed only the flimsiest excuse to take profits.

Forget the Fed. Stick with the solid dividend-paying stocks you already own and consider establishing or adding to positions in best-in-class names that have pulled back. Top candidates include Dominion Resources (NYSE: D) and the other 13 names in my 10 Percent Club or some of the special situations highlighted in this month’s feature article.

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