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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465042  
Subject: Re: Cyprus or US: Who is the sucker? Date: 3/21/2013 11:33 AM
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When the rates do start to go up what happens to all these fine fellows that have been so good to me and many others? Will all the people who were forced to buy these gems suddenly rediscover fixed income and abandon our lifeboat stocks?

I've given some thought to this issue over the last few months and, since you asked, I'll share a bit of my muddled thinking on the topic:

First, I think one needs to be aware of the debt level of the dividend payers, for if we do eventually enter into a rising rate cycle, those with high indebtedness may find their profits squeezed by higher debt service. One of the brand of highly indebted interest payers is the utility company sector. There are many others that also qualify.

My plan is that when I finally get a round tuit, I'll have to research the various companies I've recommended to clients and see if the utility has fixed debt or not and how long it would be before they have before needing to refinance.

Second, a rising rate environment would serve to compress P/Es generally, and a P/E contraction usually manifests itself in a falling overall market.

Third, in a rising rate world, those companies with little or no debt will likely have less impact on their bottom lines (provided that their business didn't contract from other, more indebted companies finding themselves too cash strapped to continue to buy from the more prudent entity).

Fourth, the generally contracting market in a rising rate environment might cause the central bankers/manipulators to provide more stimulus which would muddy the waters once again....

Having gotten this far in my thinking, things started to go circular again which is something that makes me somewhat dizzy (er?), so I've basically shifted from recommending primarily utility companies for those who wish a primarily dividend-based portfolio, to recommending low debt companies with decent yields.

Poz
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