Dividend payers get a break from Fed decision

[September 19, 2015]  By Caroline Valetkevitch
 
 NEW YORK (Reuters) - The Federal Reserve's decision not to hike interest rates may have brought renewed volatility and a stock market selloff, but it also carved out breathing room for a couple of sectors: dividend payers and housing stocks.

With 10-year Treasuries now yielding around 2.14 percent, the 2.2 percent dividend yield of the overall S&P 500 should appeal to income-hungry investors who are convinced interest rates will stay low for a while.

Some sectors' yields are much higher. Telecommunication services companies are yielding 5.35 percent, for example.

Utilities and real estate investment trusts (REITs) have gained ground since the Fed announced its decision. The S&P utility index, though down slightly on Friday, was the best-performing sector since the Fed announcement.

"We could be in a lower-for-longer environment, and ... some of the stocks that have yield components, whether it's REITs or utilities and other dividend stocks that have sold off, maybe those will eventually find a footing here and get some flow," said Stephen Gutch, senior portfolio manager at Federated Investors in Rochester, New York. "They're fairly valued for a higher-rate environment, so I think they're attractive right now."

Since they compete with bonds, big dividend-paying stocks have benefited in recent years from the ultra-low interest rate environment, with the S&P utility index registering a 24.3 percent gain in 2014, the best of any S&P sector.

But this year, utilities have retreated as Treasury yields rose on the prospect of a Fed rate hike. With the Fed now holding off, the sector may fall back into favor.

"When I look at utilities that are yielding in the 4-percent range, I think they're priced for what I'd call a normal 10-year Treasury yield - call it 4 or 5 percent - because with utilities you're still going to get some earnings growth," said Josh Peters, director of equity income strategy at Morningstar. "I'd have a similar take on REITs."

Although dividend payers provide a certain measure of protection in volatile markets, they are by no means sheltered from the market's ups and downs. Volatility most likely will stick around, analysts say, as investors reassess the prospects for interest rates and global economic growth.

"We believe we have moved from a market where one should simply buy the dips, to one in which one ought to also sell rallies," Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York, wrote in a research note.

Another area of the market that could benefit from the low-for-longer rate environment is the housing sector, with prospects of continuing low rates helping mortgage seekers.

As the jobs market and income growth improve, demand for housing should rise as well, Fed Chair Janet Yellen said on Thursday.

Housing shares have outperformed the broader market this year, with the PHLX housing index up 10.9 percent, compared with the S&P 500's decline of 4.5 percent.

Next week, reports on existing and new home sales could move stocks like Lennar or PulteGroup.

(Reporting by Caroline Valetkevitch; Editing by Nick Zieminski)

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