2 Dividend Stocks to Buy If Rates Go Higherhttp://www.fool.com/investing/general/2013/08/18/2-dividend-stocks-to-buy-if-rates-go-higher.aspx Jordan Wathen
August 18, 2013
Some stocks are more exposed to changes to interest rates than others. Every day that the 10-year U.S. Treasury rises, for example, yield-intensive REITs such as Realty Income take a dip.
Buying and leasing real estate is all about the spread between borrowing costs and leasing revenue. When rates head higher, profits dwindle -- and REITs look less appealing to dividend investors.
But not all dividend stocks are doomed if Federal Reserve chief Ben Bernanke cuts back on quantitative easing. Here are two stocks that could pop on a sudden increase in interest rates.
An interest-rate prospector
BDCs should be among the hardest-hit stocks if rates jump, since they lend to high-risk borrowers and buy very illiquid securities. But Prospect Capital is different. Its managers have prepared for a rising rate environment by investing primarily in floating rate debt.
Roughly 85% of its loan portfolio floats up or down with interest rates. Some 75% of the portfolio is first-lien, secured debt, making it first to collect should its portfolio companies go under. In the nearly six years since the financial crisis, Prospect Capital hasn't experienced a single non-payment on any of its loans.
Its investments are just one side of the equation, however. The company uses leverage to juice returns, borrowing low to lend high. All of the company's liabilities are of the fixed-rate variety, meaning any uptick in rates will benefit it at the top line and add nothing to its funding expenses.
Prospect Capital is a great dividend stock for a rising rate environment. Its $0.11 monthly dividend gives the stock a yield of 12%. Investors shouldn't expect significant capital gains, but higher rates could lead to substantial dividend increases, perhaps to the tune of 20% or more over the coming years.
A Bernanke-resistant broker
Financial-services company BGC Partners (NASDAQ: BGCP) offers brokerage services ranging from opaque financial derivatives to com