5 Dividend Kings in Danger

Interest rates have risen sharply in recent weeks, and that's been bad news for the bond market. But the repercussions of higher rates are starting to make themselves felt throughout the financial markets, and if the trend continues, then some high-yielding dividend favorites could be the next stocks to fall.

Why you should care about Treasuries
Rates on 30-year Treasury bonds jumped again yesterday, pushing the yield on the long bond above the 4.5% level for the first time since early May. Obviously, that's been terrible news for bond investors, who've seen big capital losses on their holdings in recent months.

But what you may not realize is that 30-year Treasury bonds actually have an impact on something that's incredibly important to millions of Americans: mortgage rates. In fact, there's a very strong correlation between long-term Treasuries and interest rates on 30-year mortgages, and that's has two important consequences: one for homeowners, and one for dividend investors.

Goodbye, cheap mortgages
The immediate impact from higher rates comes from people trying to buy a home or refinance their mortgages. According to figures from Bankrate, 30-year mortgage rates have jumped from below 4.25% as recently as October to 5% today. Similarly, rates on 15-year mortgages have gone up from around 3.6% to 4.3%.

That may not sound like much, but tell that to someone trying to buy a home. If you're trying to borrow $300,000, a 5% rate will cost you $1,610 per month, whereas a 4.25% rate would give you a monthly payment of just $1,475. Put another way, if all you can afford is that $1,475 figure, then the amount you can borrow has gone done from $300,000 to around $275,000.

Obviously, that's bad news for just about anyone involved in the housing market right now. Borrowers who can't borrow as much can't afford as many of the homes that are currently available. Sellers then have a smaller pool of potential purchasers, forcing them to consider cutting asking prices. And home builders Pulte (NYSE: PHM) and Toll Brothers (NYSE: TOL) in turn have to keep offering richer sales incentives to get qualified buyers to walk in the door.

Goodbye, big dividends?
The connection between Treasuries and housing is fairly easy to understand. But the other problem that investors seem to be ignoring thus far is the impact of higher rates on the mortgage-backed securities (MBS) market. Just like Treasuries, MBS prices have fallen sharply as rates have risen.

That's bad news for any investor who currently owns MBSs. And some of the biggest holders of MBSs are mortgage REITs, which have been taking advantage of huge spreads between short-term and long-term rates to reap big profits, which it then passes on to shareholders. Just look at the sheer amount of MBSs on the books of some of the most popular mortgage REITs:

Source: Yahoo Finance, SEC filings.

As MBS prices fall, these companies might have to write down the value of their MBS assets, hurting earnings and potentially forcing dividend cuts. Yet so far, none of these stocks has shown signs of falling. In fact, many of them have risen recently, perhaps because the market sees higher spreads between long rates and short rates as good for these companies.

Now it's true that most of these companies have swaps in place to hedge against interest rate swings like these. But the question is whether their hedging will be adequate. MFA, for instance, has swaps with a notional value of just $3 billion, less than half the value of its MBS portfolio. Similarly, Annaly has $25.9 billion in notional value for its swaps, while American Capital weighs in at $4.2 billion.

Also, if the companies can acquire new MBSs now, then the current wider spreads will mean more profits. But some of these REITs are already huge, and drawing more capital from investors who know that spreads are nearing their maximum will be a huge challenge.

Protect yourself
All good things must come to an end, and as the bull market in bonds appears to come to an end, rising interest rates will start being felt throughout the financial markets. It may be too late to refinance your mortgage at record low rates, but if you've been betting big on mortgage REITs, you might want to take a closer look to make sure you're comfortable with the interest rate exposure you have.

To get the best ideas for safe, reliable dividends, click here and check out the Fool's free report on dividend stocks, which includes 13 strong candidates to take a closer look at.