NEW YORK--As Treasury rates rose Friday, dividend-paying stocks
yielded only one thing: pain.
Utility stocks, real-estate investment trusts and preferred
shares all slid after the June jobs report showed the economy added
more jobs than expected last month.
The more upbeat reading on jobs creation is seen as increasing
the likelihood that the Federal Reserve will begin to gradually
reduce the its efforts to pump money into the financial system
through $85 billion in monthly bond purchases in the open market.
Those bond purchases and ultra-low interest helped drive investors
into stocks with higher dividend payouts.
Yields on the benchmark 10-year Treasury note rocketed as high
as 2.719% on Friday, its highest level since August 2011. That's
seen as reducing the appeal of those higher-yielding
investments.
"As the 10-year creeps up, there's more competition for those
marginal dollars," said William Nichols, head of U.S. equities at
Cantor Fitzgerald.
Yield-focused defensive-sector stocks--utilities,
telecommunications and consumer staples--were the only sectors in
the S&P 500 to lose ground on Friday. The iShares Select
Dividend ETF (DVY) fell 0.3%, while the S&P 500 ticked higher
by 0.3%.
Yield-heavy preferred shares, a big recipient of yield-seeking
inflows, were hit. The iShares S&P U.S. Preferred Stock Index
fund (PFF) dropped 0.6%.
Preferred stocks bear the characteristics of both equities and
bonds, and generally offer fixed-maturity payouts closer to bonds.
PFF offers a 5.9% dividend, nearly three times higher than the SPDR
S&P 500.
Rising rates on Friday gave no quarter to real-estate ETFs, or
shares tied to rate-sensitive homebuilders. The $17.5 billion
Vanguard ETF REIT (VNQ) lost 2.1%. The iShares U.S. Real Estate ETF
fell 2.4% (IYR), and was on the verge of turning negative for the
year.
"Homebuilders are in a pickle," Mr. Nichols said "The builders
got ahead of themselves a bit--same thing in the REITs--and they
got too frothy on the way up."
As recently as May 22, the day Fed Chairman Ben Bernanke first
said the Fed could pare back its easing program if the economy
strengthens, the iShares REIT ETF had been up 14% for the year.
Higher interest rates will raise financing costs, and taking the
bloom off of homebuilder stocks; the fear is that rising mortgage
rates will stem borrowing and curtail home buying.
The iShares US Home Construction ETF (ITB) dropped 2.6%, while
the SPDR S&P 500 Homebuilders ETF (XHB) slumped 1.4%.
Still, an improving economy could eventually filter back into
the recently beaten-up sectors.
"As the economy chugs along, and if the jobs market is getting
better, ultimately that's going to trickle back into real estate
and the builders," Mr. Nichols said.
Write to Chris Dieterich at
christopher.dieterich@dowjones.com
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