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By Josh Peters, CFA and Jeremy Glaser | 09-22-2015 04:00 PM

Dividend Investors: Don't Lose Sleep Over Rate-Hike Worries

In many cases, the market is already pricing in higher long-term rates, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. What impacts could higher rates have on dividend payers? I'm here with Josh Peters--our director of equity-income strategy and also the editor of Morningstar DividendInvestor newsletter--for his take.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: Let's start with the basics of how dividend investors should think about rates generally. Should they care about what happens with short-term rates or is it really only the long term that matters?

Peters: I think it's almost totally the long term that matters. Wall Street's obsession with Fed policy, especially over this first interest-rate increase that we're going to get--whenever we get it--I think is frankly unhealthy. I think it's a lot of people with very short-term time horizons to begin with obsessing about something that really is not going to have a significant effect on the economy or the financial markets.

Instead, you do want to have a much longer-term horizon. You want to be thinking in terms of five years, 10 years, 20 years, and beyond because that's where the bulk of the value of future dividend payments to shareholders are. That's where it matters what those long-term interest rates are going to be.

Glaser: But those long-term rates likely are going to go up--maybe starting with the short-term rates rising. What impact is that going to have on dividend stocks?

Peters: Well, you've seen a pretty stable rate environment this year, even though there has been this underlying assumption that the Fed is going to start raising interest rates and that long-term interest rates have to go up. I don't think you want to dismiss the possibility that interest rates could stay relatively low for a long time. This isn't even so much a matter of Fed policy as it is an environment of low inflation, where there is a large pool of savings globally still chasing relatively few investment opportunities. So, if you think about the supply and the demand for investable funds, there is still a mismatch that pushes the price down--in this case, it pushes interest rates down.

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