Lessons from 1978

Lower-yielding dividend stocks may outperform higher-yielding stocks when long-term interest rates rise materially, especially when companies can grow revenues and cash flows.

• From January 1978 through December 1979, the 30-year Treasury yield rose about 2 percentage points to 10%, while the 10-year yield increased about 2.5 points.
• U.S. stocks delivered positive, single-digit returns during those two years despite higher inflation, while energy companies benefited from their ability to raise prices alongside inflation.
• Utilities generally underperformed because regulated rates limited their ability to increase revenues in line with inflation, while financial stocks faced pressure when short-term rates rose faster than long-term rates.
• The lowest-yielding quintile of U.S. dividend stocks returned 56% from January 1978 to December 1979, versus 11% for the highest-yielding quintile.
• A similar relationship appeared in Germany, where dividend yields rose alongside bond yields in the late 1970s.

Takeaway: If today’s environment echoes the late 1970s, investors may find better opportunities in dividend-paying companies with the capacity to grow revenue and cash flow, rather than simply selecting the highest-yielding stocks.