Global Macro: Do Higher Rates Endanger Dividend Stocks?

NEW YORK (TheStreet) -- As the Treasury yield curve widens, dividend-paying stocks could show relative weakness compared with the overall market.

In this article, the yield curve is represented by the iShares 1-3 Year Treasury Bond (SHY) over the iShares 20+ Year Treasury Bond (TLT). An increase in the price of the indicator signals that the gap between long-term and short-term rates is widening.

Last May, the Federal Reserve hinted at cutting its stimulus program by the end of the year. That ignited a massive selloff in long-dated Treasury bonds and a spike higher in interest rates.

Generally, interest rates and the price of fixed-income products move inversely. Thus, when investors are bearish on bonds, interest rates begin to rise.

Many market participants believed a similar selloff in bonds would occur when the Fed actually began cutting the stimulus in December. Much to their surprise, the long-dated bond index was bid higher as the taper was rolled out.

At that time, U.S. manufacturing and labor market data had vastly underperformed expectations, which led to anxiety within financial markets that the economy wasn't ready to operate without Fed support.

Worries about manufacturing and the job market, as well as a selloff in emerging-market assets, led to a strong move higher in Treasury bonds because of their attractive safe-haven status. Global investors piled into Treasury products, pushing down interest rates and contracting the yield curve.

As rates fell, both fixed-income products and dividend-paying stocks showed relative strength compared with other financial assets. Stocks that pay large dividends usually show price movement similar to bonds because of their steady issuance of yearly payouts.

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