Aug 29

What happens to dividend stocks if Bill Gross is right and bond yields soon rise

By MultiplyWealth's Team

Bill Gross at PIMCO, the world’s largest bond fund manager, says that 10-year Treasury yields will soon bottom out, which if true could impact dividend-paying stock prices.

“Even with QE3, Treasury yields have practical limits,” Gross tweeted in recent days. “(A) 1.5% 10 year is a good common sense bottom.”

The 10-year bond and dividend-paying stocks both attract yield-seekers, of course. Yet investors are more willing to buy the dividend-paying stocks when bond yields are extremely low. They are less attracted to dividend-paying stocks, however, when they can get more favorable bond yields.

So if Gross is right and if 1.5% is the Treasury yield bottom, that could help mark a shift away from utilities and other high dividend paying stocks that have run hard for much of the past two years.

The chart below shows the way that the Utilities Select Sector SPDR (XLU), made up of high dividend-paying utility stocks, tends to move in the opposite direction of Treasury yields.

But what if Gross is wrong?

Portfolio manager and World Beta Blog author Mebane Faber suggested earlier this year that Japan may offer a comparison for what could happen to U.S. Treasury yields in the years ahead.

Faber makes the case that 1.5% U.S. Treasury yields might not be a floor at all and that the yields may continue to collapse toward 0% over a full decade to come.

In Faber’s case, a long-term lull in bond yields may lead to a continued uptrend for utilities and other big dividend-payers.

If you want to talk about how potential market events or the fiscal cliff might affect your equity portfolio, and perhaps talk about whether some of our defensive-minded investment strategies might be right for you, write Multiplywealth at It’s your own account; you can see the balance change on a daily basis, make investment changes extremely quickly, and add to or pull your money at your complete discretion.

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