Last week I gave several presentations on income stock investing at the Money Show in Las Vegas. During the Q&A after my talks, plus at some others I attended, it was obvious that rising interest rates and the effect of higher rates on dividend stocks is a major concern among income seeking investors. With fixed income investments like bonds or bond funds, rising interest rates will automatically drive down investment values. However, investors looking into stock market options for higher yield investments can lower the risks associated with higher rates by following a few simple strategies that let the stocks you own increase dividends as rates rise.
Rising dividend payments will keep your income up with higher interest rates. Investing in companies that have a history of raising dividends and have future plans to grow the dividends paid to investors will have a growing income stream no matter what happens with interest rates. Both the master limited partnership (MLP) and real estate investment trusts (REIT) sectors include companies that pay both attractive yields and can be counted on grow dividends in the future. A point to remember is that these companies fund growth with a combination of equity through the issue of new shares and borrowing. The safest dividend growth companies will have a combination of investment grade credit ratings so they can continue to borrow if markets get tight and/or generate free cash flow in excess of dividend payments that can be used to fund growth projects without accessing the stock or bond markets.
Another strategy is to search out those companies making loans with variable interest rates. Within the REIT universe of companies are those that focus on the finance side of real estate and have investment strategies that will produce growing business profits – and dividends for investors – if interest rates rise significantly.
If you are worried about a shift in higher interest rate trends, take a closer look at the shares of these three companies:
Global Partners LP (NYSE: GLP) is an MLP that sells gasoline, fuel blending products, diesel fuel, heating oil, kerosene and residual oil on the wholesale market. The company also retails fuels through company owned gas stations and by selling branded motor fuels. Currently GLP sports the highest distributable cash flow to distributions ratio of any MLP at 2.7 times. A high coverage ratio provides the cushion GLP needs to continue growing the distributions paid to investors. Global Partners yields 6% and the quarterly payments have been increased every quarter for the last two years at a 7% per year compound growth rate.
Blackstone Mortgage Trust, Inc. (NYSE: BXMT) is a commercial mortgage REIT managed by private equity fund manager The Blackstone Group (NYSE: BX). In mid 2013 Blackstone repurposed the previously stagnant BXMT to focus on the under-served commercial mortgage sector with the goal to become a major player. As a result of recently moving into this type of lending, BXMT does not have an existing book of fixed-rate loans that would suffer from higher rates. The company is originating new commercial mortgages with both the loan rates and funding sources tied to LIBOR. The company is on record stating that income will increase if short term rates move higher. Blackstone Mortgage Trust currently yields 6.5% and has increased the dividend for each of the two quarters since the new focus on commercial mortgage lending.
New Residential Investment Corp. (NYSE:NRZ) is a finance REIT that invests in the niche product of mortgage servicing rights. Mortgage service companies are entitled by contract to receive a certain percentage on the mortgage loans serviced. The service rights typically produce cash flows well above the cost of actually servicing a book of mortgage loans. NRZ buys into the rights to share in the profits above the servicing costs. Servicing rights are a depleting asset with cash flows that decrease as loan balances in a pool of loans are paid down or are refinanced. Rising interest rates result in slower mortgage payoff rates, increasing the return to the owners of the servicing rights. NRZ currently yields 11%.