High Yield Opportunities from Rising Interest Rates

First off, let’s dispense once and for all with the fallacy that rising interest rates are always a bad thing for dividend paying stocks.

A big increase in borrowing costs can certainly derail earnings and dividends of highly leveraged companies. And the Federal Energy Regulatory Commission recently cut PG&E Corp’s (NYSE: PCG) allowed return on equity for transmission to 9.26 percent, meaning there’s no guarantee regulators will allow returns to keep pace with rising interest rates.

But as my table “Dividend Paying Stocks and Interest Rates” makes clear, there is no quantifiable relationship between changes in benchmark interest rates and returns for stocks that pay dividends. Consider utilities’ quiet rally this year, which has occurred while the yield on 10-year Treasury notes has risen by 79.4 percent.

Neither is Federal Reserve tightening always negative for dividend stocks. The Dow Utilities Average returned roughly 60 percent from June 2004 through June 2006, one of its best performances ever. And it occurred while the Fed Funds rate increased from 1 to 5.25 percent.