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What Fed hikes mean for div­i­dend stocks

USA TODAY US Edition - - MONEY - Adam Shell @adamshell

Are stocks that pay dividends in trou­ble now that the Fed­eral Re­serve is se­ri­ous about rais­ing in­ter­est rates back to more nor­mal lev­els? (The Fed hiked rates Wed­nes­day for the third time since De­cem­ber and said an­other hike is likely this year with three next year.)

The an­swer de­pends on what kind of stocks you own, ac­cord­ing to an anal­y­sis by Santa Barbara As­set Man­age­ment that looked at how div­i­dend-pay­ing stocks have done the past eight times since 1972 the Fed has been in rate­hike mode. The anal­y­sis found that stocks in the S&P 500 stock in­dex that not only pay out a cash div­i­dend, but which also in­crease the pay­out reg­u­larly, do best, post­ing av­er­age 36-month re­turns of 14% in those past tight­en­ing cy­cles. The next best per­former? Div­i­dend pay­ers that didn’t boost pay­outs, with an av­er­age gain of 8%. Com­pa­nies that pay dividends but cut them fared the worst, post­ing an av­er­age loss of 2%. Non-pay­ers rose 1%.

So what ex­plains “div­i­dend grow­ers” bet­ter per­for­mance? When the Fed is push­ing rates higher it nor­mally means the econ­omy is do­ing bet­ter, which ben­e­fits well-run com­pa­nies that can boost sales and earn­ings. That frees up cash to in­crease dividends and give more profit back to in­vestors, says Hai Vu, di­rec­tor of re­search at Santa Barbara As­set Man­age­ment.

In re­cent years, old tech com­pa­nies such as Mi­crosoft, as well as tech ti­tans such as Ap­ple, have emerged as div­i­dend grow­ers.

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