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What Do Rising Interest Rates Mean for Dividend Stocks?

Morningstar’s U.S. markets strategist Dave Sekera discusses the impact of inflation and rate hikes on dividend-paying names.

The following is an excerpt from the video series Dividend-Stock Deep Dive, hosted by Morningstar DividendInvestor editor David Harrell. Watch the full interview.

David Harrell: We’re certainly experiencing higher inflation these days, and we keep seeing the headlines that the Fed is going to raise short-term interest rates. How might an increase in short-term rates like that affect the prospect of dividend stocks?

Dave Sekera: I guess, maybe the first part of the answer there is, yes, we are certainly seeing inflation run pretty hot these past couple of months. And in fact, according to our economics team, we are expecting inflation to continue to run hot for a few more months before it starts to moderate. But when you look at the average inflation rate for the full year this year, we're looking at about 3.6%. Having said that, it will continue to moderate in the second half well into 2023. So, then, we're looking for inflation to drop all the way down to 1.4% before going back to more like a normalized kind of 2.2%, 2.3% long-term inflationary run rate.

So, yes, the Fed is definitely going to be raising rates this year. The market is certainly pricing in three rate hikes. I think you also need to make sure you put that into context that we are coming from a 0% interest-rate policy. So, even with those three rate hikes this year, we're still only getting to 0.75% to a 1.00% fed-funds rate, which when you look at a historical long-term chart, the only time we'd ever been there before was during the global financial crisis and never even had a federal-funds rate that low in the past. So, from my perspective, I don't expect increases in short-term rates really to impact those dividend-paying stocks.