A better, simpler, way forward
The most obvious winner, in a higher interest rate climate, should be dividend stocks. Recently, I’ve come to believe that well diversified dividend funds are the best place for your money today.
This idea is based on some simple logic.
1. There is always a “tug of war” for your investment dollars taking place between stocks and bonds. As interest rates rise, dividend paying stocks will need to increase pay-outs to stay competitive. Considering how flush most balance sheets are with “hoarder-like” cash piles, this is very likely.
2. With the market at all-time highs, the chances of a sell off are increasing by the day. So why not get yourself in a well diversified fund? You can take advantage of stock market gains, without worrying about a potential correction.
A top fund, I’d recommend for this approach is the Vanguard High Dividend Yield ETF (NYSEARCA:VYM). Like most Vanguard High Dividend Yield ETF (NYSEARCA:VYM) funds expenses are low, just 0.10%, but your dividend yield will be nearly 3%. The fund has a perfect five star rating by fund rater Morningstar. It’s currently trading near a 52-week high approaching $60 per share, up about $12 per share this year.
So on top of a nice yield, the fund’s price has increased with the broader market this year. The difference with a fund like this and an individual stock however, is that the downside is limited because of diversification. This fund owns shares of great stocks like Exxon Mobil Corporation (NYSE:XOM), AT&T Inc. (NYSE:T), General Electric Company (NYSE:GE), and Wells Fargo & Co (NYSE:WFC), but it doesn’t hold more than 6% of its assets in any single stock.
There is tremendous value in that type of safety.
High interest rates? Dividends rule
While I like diversified junk bond funds over other bond investments, today’s market really calls for stocks over all bond types. The reason is very simple. When interest rates rise, bond values fall; yet when dividend stocks increase pay-outs, their values rise.
Since both interest rates and dividends are likely to increase, the choice is simple and obvious. Sell your bond investments, avoid REITs that rely on low interest rates for profits, and invest in dividends.
The safest choice truly is the best choice.
The article Interest Rates are Rising…Here’s Your Next Move! originally appeared on Fool.com and is written by Adem Tahiri.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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