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Investors should turn to more conservative dividend payers

It’s tough being a dividend investor out there and it’s only going to get tougher. Economists are increasingly talking about the possibility that the U.S. economy could grow faster than expected this year, which could force the U.S. Federal Reserve to further rein in its generous stimulus program. The recent pain felt by high-yield sectors, which have benefited from the Fed’s easy money, may be just a taste of things to come.

The cost of hedging losses in utility stocks, a traditional destination for dividend investors, recently rose to a five-year high as U.S. Treasury yields flirted with Other sectors that offer generous dividends, such as real estate investment trusts (REITs) and telecom stocks, have also struggled in the face of rising rates.

It’s hard to remember all three sectors were flying high just a year ago. REITs, utilities and telecoms all became attractive following the financial crisis as their dividend payouts offered yields that sometimes exceeded a much more attractive offer than treasuries and other government bonds, which sunk below at their lowest level.

Bond yields, of course, have come down in the past year and bond prices have rallied. But as the recent rush out of high yield shows, all it takes is one bond yield spike and investors flee dividends. That’s not a sound investing strategy. A yield may look good on paper, but it’s worth nothing if price depreciation eats into the stock.

That said, while high yield is a dangerous place to be this year, loweryield dividend stocks can still give investors bang for their buck. Arecent report from Markit said dividend yields on the are expected to increase to billion this year. Much of that will come from companies that have been more conservative in increasing their dividends since the financial crisis, such as financials.

But anyone holding onto an abundance of high-yield sector stocks are bound for disappointment this year: The U.S. economy is firing on all cylinders; tapering will continue; and, for the first time in years, there is the risk that the Fed may tighten faster than expected.

Prepare your portfolio accordingly. —