In a rising interest-rate environment, high-dividend-paying stocks have historically underperformed their lower-yielding and non-dividend-paying counterparts. The opposite is true when rates are falling or constant. In order to uncover that relationship, I looked at return data for non-dividend-paying stocks, dividend-paying stocks representing the 30% with the lowest yields, the middle 40%, and the 30% with the highest yields, from May 1953 through 2012. I ranked the monthly changes in the yield on the 10-year Treasury note and defined the quartile of months with the biggest jump in yields as periods of rising interest rates. The bottom quartile represents a falling-rate environment, while the middle 50% a constant rate environment. I then looked at how each of the four dividend portfolios would have performed in each of those three interest-rate environments. (This is not meant to illustrate an investment strategy, but rather how dividend-paying stocks tend to behave in different interest-rate environments).
Morningstar: The Hidden Risk of Investing in Stable Companies
