Exelon Corporation (EXC), Duke Energy Corp (DUK): Will Dividend-Paying Stocks Fall More Than the Market?

Finally, mortgage REITs have taken substantial hits since the Federal Reserve signaled the return of higher rates. American Capital Agency Corp. (NASDAQ:AGNC) is down almost a third since the end of April, as shareholders prepare for what could be the end of favorable conditions for the mortgage-REIT industry and its high-leverage business model.

Why dividend stocks are falling
The key to understanding the pressure that dividend-paying stocks are seeing is to go back to what made investors buy them in the first place. For those who’ve understood the power of dividends all along, dividend stocks will remain a vital part of their overall portfolios, so they’re unlikely to buy or sell based on short-term conditions.

But for those who bought dividend payers as substitutes for bonds, higher rates on fixed-income alternatives will entice them to return to bonds and sell off their dividend stocks. Consider: The average P/E on the iShares dividend ETF has risen to more than 19, implying an earnings yield of just over 5%. With a dividend yield of 3.6%, there’s not much extra room for the ETF’s underlying components to grow.

In the end, two scenarios could produce a dividend-stock decline. If rates keep rising, then bonds could recapture the attention of income investors, leading to a broad sell-off. Meanwhile, if growth stocks start to outperform mature dividend payers, then stock investors will chase that performance, selling off their dividend stocks and leading to potential declines in an asset-allocation shift.

Watch those dividends!
The crosscurrents in dividend-paying stocks will be interesting to watch for months to come, as the Federal Reserve starts to implement its promised new policies. With several scenarios that could produce further declines, be sure to watch your portfolio’s risk level to make sure you’re not overexposed to adverse conditions in the future.

The article Will Dividend-Paying Stocks Fall More Than the Market? originally appeared on Fool.com.

Fool contributor Dan Caplinger owns shares of iShares DJ Select Dividend ETF. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Exelon.

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