The voice, always edgy, was borderline breathless. "Jeff," began
Jack, a man in his seventies from Philadelphia who is a
subscriber and regular caller, "some of my stocks are bothering me.
Ya think I oughta sell AT&T and Verizon and American Electric
Power? Whaddya think is going on?" This was on a day when the Dow
Jones industrial average fell 106 points (less than 1%). But some
of Jack's stocks and other top-notch dividend payers, including
utilities and real estate investment trusts, took far bigger
Consider: In roughly two weeks, Verizon Communications (symbol
) fell from $53 to $48; American Electric (
) dropped from $50 to $46; and my favorite REIT, Realty Income (
), tumbled from its all-time high of $55 to $45 (prices are as of
The proximate causes were the frothy prices of these stocks
(they had rocketed in April) and a sudden jump in interest rates.
In just a month, the yield on ten-year Treasuries surged from 1.70%
to 2.16%. Because rising rates could enhance the appeal of bonds
for income-oriented investors, the decline in these scalding stock
groups is not illogical, although a government bond paying 2.2%
still isn't competitive with a utility yielding 4% or a REIT at
But what shocked me, and surely scares a guy like Jack, is how
the retreat of dividend payers conjures up so much loose use of
the dreaded word bubble. From CNBC to the blogs on Seeking Alpha to
brokerage analysts' commentaries, bubbles are everywhere--dividend
bubbles, REIT bubbles, bond bubbles and now a new housing bubble.
You'd think that the Nasdaq was back at 5000, inflation was
surging, janitors were buying $800,000 McMansions with gains from
money-losing Web firms, and Ben Bernanke was set to announce a big
hike in short-term interest rates (the ones that are currently near
Those would be, to quote a sensible definition of a bubble,
events that "foster and amplify" wild herd behavior that culminates
in a disaster. The original bubble, the blowup of the South Sea
Company, lured Englishmen in 1720 to bet their spare pounds in a
failed scheme to get rich trading with South America. South Sea
shares soared some 800% in months and collapsed even more quickly.
The affair led to hostilities between Britain and Spain as well as
an economic meltdown. How does that correspond to an 8% correction
in an electric utility index that, at its peak, was up 18% for the
year? Or to a $10 fall in the shares of Realty Income, a growing
REIT with secure earnings that began 2013 at $40 and ended May at
$45? Folks, it doesn't.
Don't panic. Remember, most of you buy dividend stocks for the
income and maybe a tad of appreciation. Sometimes, the stocks fall.
But there is scant evidence that utilities, property-owning REITs,
oil-and-gas pass-throughs and cash-rich industrial firms are in a
bind that could result in an interruption in tomorrow's dividends.
I'm a bit more worried about mortgage REITs, which need higher
long-term interest rates to recharge their sagging profit margins.
But even the biggest of that breed, Annaly Capital Management (
), which at $14 is sitting at a four-year low, earns enough to
cover its 45 cent quarterly dividend (although the payout may soon
fall to 40 cents).
I did advise Jack that if his stocks were making him nervous, he
should sell, even if it meant incurring a tax bill on his winners.
But that doesn't mean it's a good idea to turn into a trader. Are
you prescient enough to sell AT&T for $40 and buy it back at
$35? And repeat the feat with other stocks?
The more critical issue is whether (to borrow a phrase from the
policy wonks) there is an "existential threat" to the future of
dividend-paying stocks. In a slow-growth, low-inflation economy in
which companies are rich in cash, there isn't--unless you see
bubbles that aren't bubbles.
Jeff Kosnett is a senior editor at Kiplinger's Personal