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Should Dividend Investors Sweat Interest-Rate Risk? (Part 1)

While higher-yielding stocks tend to have a low degree of sensitivity to market movements, they have a strong negative relationship with interest rates.

Ben Johnson 03.01.2020

There's a lot to like about dividends. Getting a regular check in the mail from the companies you own is a testament to their discipline, the health of their business, and their confidence in its future. But the stock prices of firms with stable cash flows tend to be more sensitive to fluctuations in interest rates than those with more-volatile cash flow streams. Here, I'll examine this relationship in more detail to understand whether it's something investors should sweat over.

Asset Prices and Interest Rates Down by the Schoolyard

Imagine interest rates and asset prices as kindergarten pals mounted on either end of a seesaw in the schoolyard. As rates rise, asset prices tend to fall. When rates come down, asset prices get a lift. These ups and downs are most pronounced for long-lived assets that produce predictable cash flows, like long-duration bonds.

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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