Dividend Growth Equities Outperform During Increasing Interest Rate Periods

At the end of 2013 most if not all strategists expected interest rates to rise with the anticipated end of quantitative easing. However, the market proved the consensus point of view wrong. As the below chart shows, the high rate on the 10-year treasury occurred at the beginning of 2014 at just over a 3% yield. Throughout the year the interest rate trend was lower culminating in a spike lower to 1.87% in mid October.

From The Blog of HORAN Capital Advisors

The consensus view for interest rates in 2015 is the same as 2014, that is, rates will end the year higher. If this higher rate cycle is realized, investors realize the impact on bond prices is a negative one. For stocks though, a higher Fed rate cycle historically is not a negative for equities. As the below chart details, during periods of rising interest rates, dividend growth stocks have generated higher, and positive, returns with less volatility.

From The Blog of HORAN Capital Advisors

Source: Blackrock (pdf)

Investors should keep in mind dividend paying stocks historically dip lower an average of 9% during the first 3-4 months of the increasing rate cycle.

Finally, in an early 2014 article in the Wall Street Journal, the author looked at average calendar year returns going back to 1963. The table included in the article(below) notes large company stocks generate near double digit returns during rising rate periods with small caps generating mid teens returns.

From The Blog of HORAN Capital Advisors

Source: Wall Street Journal

If rates do rise in 2015, stocks may face an initial downward shock; however, over the entire rate cycle, stocks can be a positive contributor to one's portfolio performance.