The final meeting of the Federal Reserve on Dec 16 is sure to cook up a storm as it will likely result in an interest rate hike for the first time in almost a decade.  

Notably, in a speech to the Economic Club of Washington, Fed Chairperson Janet Yellen articulated her confidence in the U.S. economy. Further, Yellen advocated that the two requirements for a Fed rate hike, i.e. enhancement in labor market and an increase in inflation have been achieved.

Rate Hike Effect

However, the looming rate hike raises a vital question: How will the rising interest rates impact dividend-yielding stocks?

The common opinion of income investing is that this investing spectrum underperforms in a rising rate environment as the benchmark Treasury bond yields start to ascend. Thus, investors tend to dump high-income securities in such a scenario as they are expected to lose some of their sheen.

However, investors should note that dividend investing is still in fine fettle. This is because volatility levels are liable to flare up once the U.S. economy shifts from a loose to a tight monetary era and some market corrections look inevitable, though just for a while.

The dividend earned from such securities should then act as a hedge against economic uncertainty, making up for the likely capital loss and provide downside protection through substantial yields on a regular basis. Further, dividend stocks are generally less volatile than non-dividend stocks and proven long-term outperformers.

Finally, though the Fed is highly expected to turn hawkish in December, it constantly asserts that it will opt for a slow rate hike trajectory making dividing investing a not-so-downbeat area in the coming days. Even if the yields rise ahead, investors may look for benchmark Treasury yield beating options that offer decent capital gains in a choppy market.

Meanwhile, against the general view, dividend growers have historically performed well when inflation and interest rates rise. In fact, according to data compiled by Ned Davis Research, three years post the first federal funds rate hike by the Fed, dividend growers outperformed non-payers by more than 17% points.

Is Everything at Stake?