Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
Indeed, when interest rates rise, you expect the value of preferred stocks, bonds, and even dividend paying stocks to fall to keep their rates competitive.

The usual strategy to minimize that effect is to buy fixed maturity date securities like owning the bonds themselves or something like CDs. As long as you hold to maturity (and the issuer can afford to pay) you expect to collect full face value. Hence, you take no loss due to rising interest rates (unless you are forced to sell prior to maturity).

Stocks with a long history of increasing dividends provide some hedge against this in that over time their yield to you may continue to increase.

As to preferred stocks, the major problem is that with interest rates at historic lows if you buy now, you may have to wait a very long time for interest rates to return to this level. So yes, that implies you being forced to sell at a loss. Of course, if you bought years ago when rates were higher, you are doing fine to hold them unless they got called.

But that is much less of a concern for preferred stocks once interest rates return to more average values. Its the extreme lows that pose the risk.

I agree that interest rates are at historic lows and likely to rise from here. If Alan Greenspan were in charge, he would be raising rates slowly to have some ammunition to fight inflation if it arises. Now we have low rates and the feds holding them lower with quantitative easing, ie the feds buying bonds driving up bond prices and keeping interest rates artificially low. So far they have mentioned plans to scale back the buying (and investors have responded just short of jumping out of windows for fear of the implications).

In short, I suspect it will be two or three years before interest rates get anywhere close to average numbers. In this situation a half percent rise over the next year would be a lot.

Mostly this matters if you need fixed income. Dividends stocks are still the best bet. Personally I'm playing for capital gains with equities these days.
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.