The never-ending saga of when interest rates will rise appears to be coming to a head as investors are now convinced the Federal Reserve will hike rates before the end of the year. Quite possibly at its policy meeting next week.
According to current Fed Fund futures data, whether we’ll see higher rates by year-end or not is something of a coin toss. Of course, the situation feels like it changes daily, which is why we’re seeing a migration away from many of the dividend-yielding stocks that have become so popular over the past two years.
In exchange for strictly high yield, investors are moving to stocks with smaller yields but strong growth potential. The effort to limit interest rate risks on higher dividend-yielding stocks is now affecting sectors like the consumer staples, telecommunication and utilities.
These sector still offer investors and traders a safer harbor from the seasonal volatility that normally haunts September and October, but the appetite for growth risk is starting to outweigh the risk of a rate hike in investors’ minds, as the inevitability of a hike draws ever closer.
In the case of some dividend-yielding stocks, a select few suffer not only from an increase in volatility, but also an increase in interest rate risk. This combination can quickly turn deadly when investors give up on the idea of higher yields offsetting volatility.
Such is the case with the following three high-yielders. Let’s take a closer look at the charts:
Dividend Stocks to Sell: Reynolds American, Inc. (RAI)
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Now, with the dividend picture changing and the anti-smoking movement continuing to gain traction it appears that there may be better yields out there for the time being. Reynolds American stock has shaved more than 5% of its value in the last three trading sessions.
In that one move, shares went from resistance at their 50-day to trading below all three key trendlines.
Momentum has now shifted to the negative for Reynolds shares as the stock’s 50-day moving average is now in a declining trend. In addition, the MACD for Reynolds American stock is negative, reflecting the shift to bearish momentum.
Reynolds American’s 20-month moving average is currently at $45.25 and should attempt to prop the shares with some support. A break below this mark will take them into a technical bear market for the first time since September 2009, suggesting a price target of $40.
Dividend Stocks to Sell: AT&T (T)
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Two weeks ago, the technicians got a warning as the stock’s 20-day crossed below its 50-day trendline. This often signals a shift in the intermediate-term outlook for a stock. Now, the 50-day moving average is trending lower itself, confirming that AT&T’s intermediate-term outlook is bearish.
T stock could grab some support at the $38.50 level from its climbing 200-day moving average and a short-term oversold signal from its Relative Strength Index. But at this rate, that is more likely to represent a dead cat bounce as this stock is widely held and thus will be widely sold.
The recent top at $44 mimics the top that we saw in 2007, a time when rates were on the rise, but also just before the financial crisis.
Watch for the charts to start providing support for AT&T shares at $38. A break of that support would increase the odds that AT&T falls back into a long-term trading range below $35.
Dividend Stocks to Sell: Colgate-Palmolive (CL)
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The sudden shift in prices has broken CL stock’s bottom Bollinger Band, which signals additional volatility as CL suffers from selling at the hands of investors looking for other yield-bearing investments.
Technically, Colgate-Palmolive shares just crossed under its 20- and 50-day moving averages. The last time that we saw a similar indication was this past December, which came ahead of a 10% decline as the market ran into a volatility pocket.
Momentum is decidedly negative, according to the stock’s MACD. The RSI readings for Colgate-Palmolive, however, suggest that we could see a short-term bounce due to oversold conditions.
Our view of the charts suggests that this would be little more than an opportunity for investors to get out of shares at a slightly higher price before the next step lower, which would likely test Colgate-Palmolive shares’ 20-month trendline, currently at $68.50. A break of this long-term technical support would eye a bearish move to $65 or lower.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
