Warsh's Rate Hike Warning Sparks Concerns Over High-Yielding Dividend Stocks

Fed Chair Kevin Warsh's recent comments at Jackson Hole have increased the likelihood of a rate hike by the Federal Reserve. The Fed's next meeting is scheduled for September 16, and traders are now pricing in a 60.4% probability of a 25-basis-point hike.

This would be bad news for many high-yielding dividend stocks, which tend to fall when interest rates rise. Higher rates make borrowing more expensive for companies that rely heavily on debt, such as real estate investment trusts (REITs) and utilities.

However, not all high-yielding dividend stocks would suffer if rates rose. Some business development companies (BDCs) and REITs invest in floating-rate loans, which would earn higher interest if rates increase.

Ares Capital, a leading BDC, has 71% of its portfolio in floating-rate debt, which would benefit from rising rates. Similarly, Starwood Property Trust, a mortgage REIT, has a predominantly floating-rate loan portfolio that would outperform in both higher- and lower-interest rate environments.