Wall Street’s recent passion for high-dividend stocks is fading.
The stock market closed lower yesterday, led by the same industry groups that had the biggest gains early in the year – rich dividend payers like power utilities and makers of consumer staples.
Rising bond yields have been an important factor behind that shift.
The yield on the 10-year Treasury note is near the highest it’s been in 13 months following a sharp increase on Tuesday.
That is giving investors who want steady income an alternative to dividend-rich stocks like power utilities, consumer staples makers and phone companies. Investors piled into those stocks at the beginning of the year, when bond yields were close to historic lows.
More broadly, after this year’s powerful bull run – the Dow Jones industrial average is up 16.8%, the Standard & Poor’s 500 index 15.6% – investors may be running out of reasons to keep ploughing money into the stock market.
“There’s a vacuum of catalysts to continue to push (stocks) higher,” said Sam Stovall, chief US equity strategist for S&P Capital IQ.
Now, Mr Stovall said, investors are wondering: “’Well, should I take some profits and sit on the sidelines and then get back in?’ ”
The Dow closed down 106.59 points at 15,302.80, a loss of 0.7%. That decline matched its advance the day before, when it closed at a record high, the ninth time it has done so this month. The Dow was down as much as 179 points in late morning trading, then rose moderately in the afternoon.
The S&P 500 index was down 11.70 points to 1,648.36, also 0.7%. The Nasdaq composite lost 21.37 points to 3,467.52, or 0.6%.
The S&P 500 is headed for a seventh consecutive month of increases, the longest winning streak since 2009. The Dow is on track to end higher for a sixth straight month.
Investors have been encouraged by positive signs on the economy recently, including sharp increases reported on Tuesday in home prices and consumer confidence.
Hiring has also been picking up and first-quarter corporate profits hit a record high. Investors worry, however, that the Federal Reserve will start to ease back on its stimulus program as the economy improves.
“At some point, interest rates will go up and that’s obviously having some impact on stocks,” said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank.
“And you’re seeing it in the sectors that you would expect. The hardest sectors hit recently have been ... the more dividend-driven stock sectors.”
Despite the decline in stocks, it seems too early to call an end to the rally. On several trading days this year, stocks have had sharp sell-offs, only to rise again as investors take advantage of the dip in prices to get into the market.