As expectations of a US Federal Reserve interest rate hike rise substantially, US 10-year Treasury bond yield has risen by 0.5 percent since the start of this month, leading to the bursting of the fixed income bond market.
Bond prices crashed and dragged down the prices of dividend stocks in Hong Kong as well. A reason is that many people see dividend stocks as equivalent to fixed income securities or bonds.
Dividend Stocks are NOT the Same as Bonds
But in actual fact, dividend stocks are different from bonds, as bonds give fixed returns but dividend stocks don’t necessarily do so. For example, if you bought $100 worth of ten-year bonds with a 1.8 percent yield, you get $1.80 every year for the next ten years. However, if you were to invest $100 into CLP Holdings (0002.HK), which currently offers a dividend of 3.6 percent, you might not necessarily receive an annual dividend of $3.60 for the next ten years. What you receive can be prone to fluctuation, though I think that it is more likely to rise than fall.
If we look at the dividend history of CLP Holdings over the past ten years, we can sort of get a clue of whether it is going on an uptrend or downtrend.
If you had bought Link REIT (823.HK) ten years ago, you would have noticed that its dividend yield increased this year. Thus, again, we cannot equate dividend stocks to fixed income bonds.
Investors Speculated Bonds and Yield Stocks
Recently, dividend stocks in Hong Kong face adjustment pressures, but the greatest reason is not due to increased expectations of a rate hike. Even with hiked rates, bank interest rates would not become higher than dividend yields issued by stocks. The real reason behind the falling prices of dividend stocks is that their prices were previously driven up by speculation. But once investors sensed something fishy, they would start panic selling.
The most important goal of buying dividend stocks is to collect dividends. If you plan to do so for a long term, you’ll need to find out if the company’s income would increase over the long run.
Same thing for bonds—you buy them to collect yields. Unfortunately, most of the funds that went into funds across the globe were not intended for yield returns, but for speculation. Thanks to highly leveraged speculation, we now see more apparent signs of the bond market bursting.