Increasing interest rates & how to best position your portfolio
Many investors foresee an increase in the Fed’s short-term borrowing rate as a negative force against rising stock prices. Increasing interest rates increase the reward investors receive from “risk-free” investments and therefore cause risk to be more expensive (figuratively speaking).
Dividend paying stocks have been noted as a tool to help position your portfolio against adverse effects the an increase in interest rates could have on the market, but is this the best method? One fact investors should be aware of is that dividends will look less attractive as interest rates increase. Annual Dividend Yield – Annual Risk Free Yield = the percentage premium you expect to earn from the dividend yield alone on a stock/fund. As the annual risk free rate increases the premium is less and less (assuming the dividend yield is actually greater than the risk-free yield).
More to come…Some other methods of better positioning your portfolio for an environment where interest rates are on the rise.