Global Macro: Watch Interest Rates for Direction of Dividend Stocks
Dividend stocks are favored in low interest rate environments because the dividend yields of many companies are higher than yields on corporate or Treasury bonds.
Dividend stocks also tend to be in defensive sectors, which outperform the market during times of weakness. The stability of dividend stocks is attractive to investors, especially when equities are trading at rich valuations and are liable to fall quickly.
Interest rates are projected to rise this year, but U.S. inflation readings remain below the 2% threshold. A sharp rise in interest rates would diminish the value of dividend stocks and hurt bond prices.
Although the U.S. economy picked up steam late in 2013, inflation readings have yet to increase considerably. The low rates and continued weakness in consumer prices could weigh on the Federal Reserve's decision to increase interest rates in the future.
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