The Fed’s next move with regards to interest rates is on everyone’s mind. Although Fed officials have expressed their commitment to maintaining an accommodative monetary policy, given the overly-emotional nature of most investors, it’s highly probable that stiff selling pressures will emerge the next time policymakers merely utter the words “rate hike.”
If you’re looking to put your cash to to work in the current environment, you might be altogether fearful of making any sort of allocation for two good reasons; first and foremost, major U.S. equity benchmarks are sitting near all-time highs, making it difficult to put yourself in a buying mood when you consider how long this bull train has already run. Second, the thought of rising rates might scare you away because you don’t want to buy in right before a round of profit taking sweeps over Wall Street.
Don't Sweat the Rate Hike
So what’s the average investor to do?
Actually, there’s a simple remedy for dealing with rising rate fears, especially if you’re an income-focused investor. You must focus your efforts (and capital) on identifying fundamentally-sound dividend payers that have weathered previous rate tightening cycles; don’t bother with picking today’s “hot stock,” and instead allocate your money to companies that have a proven history of raising their dividend regardless of the interest rate environment.
Does that sound too good, and too easy, to be true? How about if you only consider stocks that have been raising their dividend for at least 25 years in a row. For the sake of being conservative, let’s consider how interest rates have behaved over the last 30 years:
Since 1985, there have been five rate tightening cycles according to investment expert Ken Fisher; furthermore, there have also been three recessions (shaded in gray).
So if you focus solely on buying stocks that have been raising their dividend for at least 25 years in a row, you truly don’t have to sweat any rate hikes (or recessions for that matter) because these companies have a history of not only surviving, but also growing their distributions, throughout the course of several cycles.
Now don’t think you can just throw a dart at the list of 25-year dividend raisers and nail a winner every time; focusing your efforts on buying solid dividend-payers is only half the battle. The real challenge is having the discipline to stick to your investments when things don’t go your way for months, and even years, at a time.
The Bottom Line
You can avoid rate hike fears by focusing on stocks that have a history of weathering several rate-tightening cycles. One way to do this is by looking to buy only dividend-payers that have been growing their distributions for at least 25 years in a row, because that long of a time frame is bound to span several cycles as well as recessions. Once you have identified great companies trading at a price you’re comfortable paying, be sure you have the discipline to stick with them, because you’re bound to encounter more than a few rough patches over the long-haul.
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