Harry Domash has been an Expert Contributor on Equities.com for nearly a year, but his experience following and advising on dividend stocks goes back much further than that. That's why we recently got in touch with Harry to get his thoughts on how the Fed raising interest rates is likely to affect dividend stocks.
Check out Harry's thoughts on the current economic climate, as well as his suggestions on which sectors are most promising below:
Equities: First off, can you give a little background for those who might not be aware of your history with dividend stocks?
Harry Domash: Well, I started out analyzing stocks in the 1990s, when the Internet was still relatively new, and I realized that all the information available on the Internet was stuff you couldn’t get before. I thought it was a great tool - it kind of democratized everything. I started writing a newsletter called Winning Investing that I published for about ten years. Then, in the early 2000s, the Internet bubble burst. There weren’t as many companies worth investing in, so I added a couple of dividend portfolios to the newsletter.
At the end of every year, I would summarize how each portfolio did. And I noticed that it was the boring dividend portfolios that did the best. So I started Dividend Detective as a separate website in the early 2000s. At the end of 2008 I closed Winning Investing and decided to focus entirely on dividend stocks, because I thought that was a better, more intelligent way of making money in the market than trying to catch the next rocket. It’s not that hard to catch the rocket; the hard part is selling before it flames out.
Equities: Obviously, you have a long background with dividends. What’s your take on dividend stocks as interest rates are likely going to be rising?
Harry Domash: Well, I don’t think anybody expects interest rates to rise enough to make a substantial difference. Most people are expecting about a one percent rise in interest rates, which would still keep them below long-term - what they used to be a few years ago. So I don’t think that’s a big deal. But what affects dividend stocks, let’s say you can get five percent from a money market account, why would you take the risk of investing in a dividend stock paying five percent? It wouldn’t make sense. But nowadays interest rates are so low, if you have a savings or money market account, you might get twenty-five cents added to it each month.
So even if they raise interest rates and you end up getting one percent or two percent from your money market account, it’s not going to hurt dividend stocks - paying stocks - much. It would hurt it if interest rates went up to three, four, five percent. Right now, it seems to me that there are a lot of other things to worry about in the market.
Equities: What do you consider to be a major concern?
Harry Domash: Well, the whole market is going down. That’s the biggest concern. I don’t think the interest rates will really make much of a difference.
Equities: Sure. In that light then, are there any positives for dividends in this interest rate market?
Harry Domash: Well, up until January, I was thinking, “Well, this is going to blow over and the market’s going to bottom and then pop back up again,” but now it looks like we may be in for a longer haul of a down market. So you really have to reorganize your portfolios to accommodate what’s happening. And for dividend stocks, what’s working now are things like preferred stocks, which are boring investments.
Let’s say Google put out a preferred stock - it doesn’t, but let’s say it did. If Google doubled its business next year, and its common stock doubled, the preferred might go up two percent. Preferred stocks are more like bonds than stocks. People buy them for the income. Many pay like five, six, seven percent dividend yields. They bounce around when the market does, but they’re much lower volatility and they usually move back up after a while. So preferred stocks have been working really well.
Tax-exempt municipal bonds have been profitable over the last year as well. So that’s another area. Basically, a lot of fixed-income stuff - it’s what’s working now, anyhow. Not high-yield, not junk bonds and stuff like that, but more investment grade seems to be what’s working. If you’re looking at individual stocks, then you have to find the ones that are out of favor and have some catalyst that’s going to make them come back into favor. For instance, we lucked out with Mattel, which we’ve had in our portfolios for about six to eight months. We bought them when they brought on a new CEO to turn the company around, and it turns out he’s doing precisely that. It’s a two or three-year process, but had its first signs of progress when they reported in their December quarter.
Another one was Target, which had a similar story. The company was mismanaged, they brought in a new CEO and now it’s doing all the right things. That’s another two or three-year turnaround story, but it’s well on its way. So in this market, in terms of regular stocks, that’s the kind of thing you have to find. You have to find the beaten down, left for dead stocks where something’s going to turn them around.
Equities: Sure. Are there any other stocks or specific sectors that you would recommend, or that you’re looking at?
Harry Domash: Well, real estate investment trusts seem to be doing pretty well. There are two kinds of real estate investment trusts. Most of them own properties like shopping centers, apartment complexes or office buildings. Those are doing really well. There’s another kind called mortgage REITs, where they invest mortgages on commercial properties or on single family residences. As a category, those do not do well in a rising interest rate environment, so I would avoid those, especially the ones that invest in residential mortgages. But property rates are another category that are doing well. And also, utilities, same old boring utilities, still chugging along.
Utilities are not affected by anything. When was the last time a utility ever cut its dividend? It’s like it doesn’t happen. So you can just buy utilities, hold onto them. That’s another good sector right now, that’s what we’re focusing on.
Equities: Great. Just one quick thing, so the news recently from Bank of Japan announced they’re going to go negative on their interest rates. More hypothetically, though, how would a negative industry environment affect dividends?
Harry Domash: I don’t know. That’s such a strange concept to me. To answer broadly, if interest rates are negative interest rates. that would likely make dividend stocks more enticing, because they’re paying. Most stocks are not going to cut their dividend.
Equities: Great. Did you have anything else you wanted to mention or any other specific advice for our investors?
Harry Domash: I think that people have to have a longer-term outlook when they’re looking at this stuff, because a lot of stocks have been beaten down. In January, some stocks were down twenty-five, forty percent. A lot of stocks have been beaten down that shouldn’t have been, and so when the market stabilizes - and it’s impossible to predict when that happens - but some of these like pipeline stocks, we know that crude oil is going down in price, we know that natural gas is going down in price, what that translates to is more people are going to use the stuff, right? If you’re a pipeline company, if you’re in natural gas, you’re going to have more natural gas flowing through your pipelines, you’re going to make more money over time. But those stocks have really been killed in January.
And so I think that people need to take a long view of these things and think about what’s going to happen a year from now, and maybe take some positions for these stocks that really got killed last month.
For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer