The prospect of rising interest rates in 2014 is sending shares of high-dividend-yielding companies lower as fixed-income assets become more attractive to investors.

The Dow Jones U.S. Select Dividend Index has lagged behind the Standard & Poor’s 500 Total Return Index by 4.6 percentage points on a total-return basis since April 30. During the same period, the yield on 10-year U.S. Treasuries has risen to 2.88 percent from 1.67 percent. The dividend group fell to its lowest level in more than a year Dec. 11 relative to the broader gauge.

The dividend index -- made up of 100 companies including cigarette maker Lorillard Inc. and Chevron Corp. -- has weakened since the Federal Reserve began bracing investors for a phase- out of its unprecedented monetary stimulus. At the conclusion of a two-day meeting May 1, the Federal Open Market Committee said in a statement it was “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

Amid this environment, “stocks that have been hurt the most are those that benefited a lot from lower interest rates,” said Brad Kinkelaar, executive vice president and portfolio manager at Pacific Investment Management Co. in Newport Beach, California, which oversees $1.97 trillion in assets.

Telecommunications, Utilities

Shares of telecommunication, utility and real-estate investment-trust companies have been hardest hit, said Kinkelaar, who manages two dividend strategy funds. “If rates continue to rise through 2014, albeit gradually, these stocks should continue to underperform the market.”

The yield on 10-year Treasuries will increase to 3.37 percent by the end of 2014, according to the median forecast of economists surveyed by Bloomberg.

With tapering very likely in 2014, a “key-risk scenario” is that the yield could climb to a “fair value” of 3.7 percent by the end of next year, said Benjamin Brodsky, global head of fixed-income asset allocation in London at BlackRock Inc. “This would be a significant surprise to the market, adding volatility to the landscape not only in Treasuries but also in other asset classes.”

For about two years prior to mid-2013, large-cap dividend- paying stocks were attractive because interest rates remained low, said Rob Morgan, who oversees $1 billion as chief investment strategist in Exton, Pennsylvania, at Fulcrum Securities LLC. Now, with yields on 10-year Treasuries moving up since May -- and the prospect of more increases -- “that will definitely hurt this strategy.”

More Competition

First « 1 2 3 » Next