Dividend investing when rates are rising | Capital Group Canada | Insights

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VIDEOS  |  October 2018

Dividend investing when rates are rising

Are U.S. rising rates problematic for dividend investors? Portfolio manager Jim Lovelace, an equity-income investor, shares what he expects in today’s environment.


Apu Sikri: Jim, you are an equity-income investor. Interest rates have been inching higher. The 10-year has hovered between 2.75% and 3%. What does that mean for dividend-paying and dividend-growing stocks and dividend-oriented strategies?

Jim Lovelace: Rising interest rates tend to be challenging for income-oriented portfolios, because a lot of the sectors that income investors invest in are very sensitive to what the current bond rate is — in particular, the slower growing, highly regulated industries such as telecommunications, electric utilities. And also the financial sector tends to be very sensitive to interest rate movements. So, it can be more challenging for income portfolios when interest rates are rising.

Apu Sikri: Stocks have continued to trend higher even as rates have been rising in the U.S. So, how are you thinking about this environment? 

Jim Lovelace: 
Well, stocks overall are not necessarily harmed by rising interest rates. And in fact, it's important to understand that the main driver for rising interest rates is strong economic activity. And that can be helpful to corporate profits. So, in the early stages of an expansion, often you'll see rising interest rates and rising stock prices, and also perhaps in the mid-cycle. 

It's only toward the end of a cycle, when there are excesses beginning to build up and the Federal Reserve is trying to slow things down, when interest rates can have a negative impact on stock prices. Folks always remember that — those last Fed hikes, as it were, that end up ending a cycle, and then they become somewhat worried when interest rates begin to rise. But interest rates rising most of the time simply means that the economy is strong and perhaps gaining momentum. 

Apu Sikri: 
What signals do you think the market is giving us in terms of rising rates? Is it that the economy continues to strengthen? What are your views on that?

Jim Lovelace: As you mentioned with the 10-year bond rate around 3% [or] thereabouts, when you look at history, that’s a fairly modest rate for long-term rates such as the 10-year. So, it isn't signaling to me that there are excesses or that the Fed is trying to stop the economy or slow down inflation. Probably rates would have to get up into the 4–5% range to be problematic. So, I don't see interest rates rising modestly from here as being a great impediment to the stock markets.

 

 

Jim Lovelace Portfolio Manager

James B. Lovelace is an equity portfolio manager at Capital Group. He also serves on the Portfolio Oversight Committee. He has 36 years of investment experience, all with Capital Group. Earlier in his career, as an equity investment analyst at Capital, Jim covered beverages & tobacco, restaurants & lodging, household products and personal care companies. Jim began his career at Capital as a participant in The Associates Program, a two-year series of work assignments in various areas of the organization. He holds a bachelor’s degree with honors in philosophy from Swarthmore College. He also holds the Chartered Financial Analyst® designation and is a member of the Los Angeles Society of Financial Analysts. Jim is based in Los Angeles.


Jim Lovelace is an investment professional on the Capital Income Builder strategy that was conceived in the U.S. more than 30 years ago. He is a portfolio manager of Capital Group Capital Income BuilderSM (Canada), available to Canadian investors on October 31, 2018.

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