With the possibility of interest rates rising looming and since the market is looking a bit toppy and nervous, I'd like to address some popular advice about dividend stock investing. Many respected and credible sources like value line recommend robust companies with a high dividend to ensure principle if a recession hits. There are two reasons why I think high dividend stocks might not work out moving forward, especially if a recession hits.
First, most companies I view as paying high dividends are highly leveraged and therefore will be adversely affected by both the tax bill, which reduces the tax credit on interest rate payments, and the rise in interest rates, which will increase the price of floating interest rates. This will jeopardize the companies ability to pay out their dividends. I'm thinking about AT&T, who is in a lot of debt and wants to take on even more debt to buy TWX. Most people won't care about watching HBO on their phone if a recession hits.
And second, if interest rates rise, then the yield on risk free government bonds will increase, and 30 year bonds are already almost at a 3% yield. If the yield goes to 5%, why take the risk on a highly leveraged company if you can have the money ensured by the US government? High dividend stocks also historically have much less price action too making a bond likely more attractive.
Submitted December 06, 2017 at 05:50AM by Adhumor http://ift.tt/2BNc3ZA
