Matt DiLallo, The Motley Fool
6 min read
Interest rates have moved sharply this year. The 10-year Treasury yield is currently over 5%, near its highest level in a quarter century, and up from its low near 4% before the war with Iran began.
Some dividend stocks are highly sensitive to changes in interest rates, while others aren’t. Here’s a look at how rates affect seven popular income stocks.
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AGNC Investment
AGNC Investment (NASDAQ: AGNC) currently yields nearly 17%. Shares of the mortgage REIT have tumbled over the past couple of months, driven lower by the surge in the 10-year:
That’s due to two factors. Mortgage REITs typically borrow short-term to fund their long-term mortgage investments. Rising rates increase their borrowing costs, narrowing the spread between the income generated by their mortgage investments and their costs. Additionally, rising rates make lower-risk investments like Treasuries more attractive to income-seeking investors. That puts downward pressure on the share price of higher-risk, income-generating investments like REITs, driving up their yields to compensate investors for their higher risk profile. In AGNC’s case, its yield has risen from around 13% to 17%.
Annaly Capital Management
Annaly Capital Management (NYSE: NLY) currently yields over 16%. Like AGNC, it’s a mortgage REIT highly sensitive to changes in interest rates. Its share price is currently down more than 25% from its peak, following AGNC’s decline.
Annaly is slightly less sensitive to rate changes than AGNC because it has lower leverage and greater diversification (it also invests in mortgage servicing rights). However, these two dividend stocks are among the most sensitive to rate changes due to their business models.
Coca-Cola
Coca-Cola (NYSE: KO) currently yields around 2.3%. The beverage giant is the opposite of mortgage REITs: its business is highly rate-insensitive. Its share price has risen sharply this year (by more than 30%), accelerating its rise amid the recent surge in rates.
Coca-Cola has several resilient features that insulate it from the impact of rising rates. It has a fortress balance sheet primarily consisting of long-term, fixed-rate debt. Meanwhile, its business has pricing power, allowing it to raise prices to offset higher costs (inflation and interest expenses). These more durable features make Coca-Cola an ideal stock to hold in any market environment.
