Should Dividend Investors be Worried on Rising Interest Rate in US?

Dow Jones Industrial Index (DJIA) plunged more than 1,000 points on 8 February 2018 and various media highlighted the concerns on rising inflation plus rising interest rates in US being the cause of the stock market decline.

The decline in global stock market again validate the idea that some investors succumb to herd mentality and swayed by emotions brought by the volatilities in the stock market.

Rising US interest rate will cause US government bond yield to increase (higher bond yield means lower bond prices), thus decrease the attractiveness of dividend yield stocks, hence investor should sell their dividend stocks,, do you agree? 

The above is the statement that you may have read from various media, what happen if we let go of our independent thinking and follow the media? we will be in for a roller coaster ride, not a good idea.

Firstly, dividend investor who aims to live off dividend income, should ignore any short term noises in the stock market. Why is that so?

1) If US inflation and interest rate increase due to stronger underlying economy i.e. low unemployment rate, robust wage growth. Isn't this a good news to equity investor in the long run?

2) If economy performs well and US consumers increase their spending on goods and services, isn't this a good news to equity investor in the long run?

3) If global economy has a synchronized recovery, thus higher inflationary pressure after many years of low interest rate and subdued inflation, isn't this a good news to equity investor in the long run?

4) If better economy translates into better company's profitability, even if dividend payout ratio remains the same, investors will benefit from higher dividend income due to higher dividend per share on the back of higher earning per share, isn't this a good news to equity investor in the long run?

Ultimately the key factor for dividend investor to assess will be the competitive advantage of the business that we are investing in, no doubt higher interest rate may cause increase in cost of borrowings or cost structure and thus impact a company's bottom line, what if the company engages in effective hedging policy or having large portion of fixed rate borrowings or possess pricing power to grow its profitability in the long run amidst higher interest rate environment?

To name a few, If companies such as Procter & Gamble (P&G), Coca Cola, 3M, Colgate Palmolive and Johnson & Johnson (J&J) are able to increase its annual dividend payout in the past 50 over years over various interest rate cycle, really the key focus for income investor is to search and invest in companies with the prospect of increasing its profitability and dividend payout in the long run.

What about the share price?

It will take care of itself for a strong fundamentals company in the long run.