Warsh's Rate Hike Warning: Which Dividend Stocks Will Get Hurt or Helped

Fed Chair Kevin Warsh recently made comments at Jackson Hole on August 28 that sent shockwaves through the market. He stated that underlying trends haven't improved enough, and if they don't start getting better, the Fed will need to act.

The market reacted immediately, with traders of fed fund futures pricing in a 60.4% probability that the Fed will deliver a 25-basis-point hike on September 16, up from 56% before Warsh's comments. Some Fed watchers are already assuming two rate hikes this year, with Deutsche Bank expecting quarter-point raises at both the September and December meetings.

High-yield dividend stocks tend to fall when rates rise because interest increases make it more expensive for these companies to borrow money and refinance debt. Additionally, rising interest rates make lower-risk fixed-income investments like bank CDs and government bonds more attractive to income-seeking investors.

Real estate investment trusts (REITs) are among the most rate-sensitive investments, as they heavily rely on borrowing to fund acquisitions and development projects. Meanwhile, mortgage REITs like AGNC Investment invest in Agency MBS, pools of residential mortgages protected against credit losses by government agencies.

However, not all high-yielding dividend stocks would lose if rates rose. Some business development companies (BDCs) and REITs invest in floating-rate loans, which earn interest that rises with rates. For example, leading BDC Ares Capital has 71% of its $29.3 billion investment portfolio in floating-rate debt.

Starwood Property Trust is another commercial lender that benefits from a rising rate environment due to its predominantly floating-rate loan portfolio.