With rising interest rates expected to continue to put downward pressure on stocks and long-term bonds, advisors are revising their dividend-paying strategies. They’re also educating clients who may feel baffled about negative bond returns and too queasy to stick with the now volatile equities they’ve come to depend on for yield.

“It’s a very different scenario that we have to live with now that we’re going back to normalization [of rates],” says Tom Meyer, CEO of Meyer Capital Group, an RIA firm in Marlton, N.J. Normalization is overdue considering “the patient has been out of the ICU since June of ’09,” he says, referring to the economy and the recession.

For much of this decade, income-hungry investors have flocked to equities paying attractive dividends. “Who was going to go ahead and buy a one- or two-year Treasury and get 80 basis points,” says Meyer, “when you could buy Johnson & Johnson or any other blue-chip stock and get two, three, four percent.”

But as risk-free interest rates become more appealing (giving investors additional opportunities to capture yield), competition for capital will heat up, he says. The recent darlings of yield-seeking investors are already feeling the “crosscurrent” of rising rates, he says. REITs, MLPs and consumer-staple stocks “are getting absolutely crushed right now,” he says. “Bonds on the longer end are getting killed.” Utility stocks have also taken a beating.

Meyer expects the Federal Reserve to hike rates a total of three or four times this year and maybe a couple more times in 2019. He encourages investors to be patient, noting that market volatility will remain until the rate hikes are out of the way.

Investors should hold on to utility stocks they own and can selectively “dip a big toe in [the sector],” he says. “I don’t think the headwinds are over by any stretch of the imagination,” he says, “but it definitely creates an opportunity.”

He favors utilities based in the southern U.S. because its population influx supports growth. He also favors water utilities, noting, “Water is the most important commodity in the world.” Two of the nation’s largest publicly traded water utilities, American Water Works Company and Aqua America, yield only about 2% but have great growth potential, he says, particularly in their non-regulated businesses.

Meyer Capital Group has lowered the duration of its bond holdings by moving directly into one- and two-year Treasury bills. The bills now offer roughly the same yields as short-term bond funds, says Meyer, but are free of principal risk and state taxes.

The firm is pursuing dividends in foreign stocks and bonds through mutual funds and ETFs. European stocks have always paid higher dividends than U.S. stocks, he says, and Europe is at least two years behind the U.S. in normalizing interest rates.

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