Investors are doing the safety dance after the surprisingly hot inflation report Wednesday. Consumer staples, telecoms and healthcare -- sectors known for juicy dividends -- rose while much of the rest of the market was heading south. Cue that '80s one hit wonder from Men Without Hats.
The State Street SPDR S&P Dividend ETF, Schwab U.S. Dividend Equity ETF and iShares Core High Dividend ETF were all in the green Wednesday, for example.
Wall Street now thinks it's almost a toss-up whether or not the Federal Reserve will hike interest rates again at its Oct. 28 meeting. The odds of a rate increase are up to nearly 40%, compared with just a 22% probability of more tightening that traders were pricing in on Tuesday.
Bond yields spiked accordingly. The 10-Year U.S. Treasury yield shot up above 5.3% immediately following the release of the consumer price index report before edging back a bit. The 10-year was yielding 5.19% minutes before the data came out.
Higher rates could put more pressure on consumers. They could also make life tougher for tech companies taking on debt to finance massive spending plans on artificial intelligence. So it's no wonder that retailers, software stocks and semiconductor companies were lower.
But the growing likelihood of more rate hikes -- futures are pricing in a nearly 35% chance of another rate increase in December -- could make havens like healthcare, staples and telecoms more attractive. That's especially the case given that these sectors have taken a hit lately.
UnitedHealth, Amgen and Merck were among the top-performing Dow stocks Wednesday. The three stocks all yield above 2%. Eli Lilly, Pfizer and AbbVie were also among the winners in the S&P 500.
Consumer staples stocks, which also pay healthy dividends, were rising Wednesday, led by gains in Walmart, Coca-Cola, Procter & Gamble and Philip Morris. The State Street Consumer Staples Select Sector SPDR ETF has a 2.6% yield.
"Dividend-focused equities have quietly done what they are supposed to do: compound steadily, with far less drama," said David Katz, chief investment officer with Matrix Asset Advisors, in a report.
But Katz argues that investors should own a mix of tech companies that pay dividends as well as more traditional income plays like consumer staples. He recommends Qualcomm, TE Connectivity, AEP and NextEra Energy as examples of "businesses positioned to benefit from AI and the electrification that comes with it" as well as "out-of-favor consumer franchises" Home Depot, McDonald's, PepsiCo and P&G.
And look at AT&T and Verizon Communications. The two wireless giants are classic "widow and orphan" stocks. They pay huge dividends, with AT&T yielding 4.9% and Verizon yielding 6.5%. The two stocks have both fallen about 15% in the past month on concerns about increased competition from SpaceX's Starlink unit. Both stocks were up Wednesday.
Investors seem to be betting that these relatively stable sectors offer shelter as concerns about inflation and higher rates persist.
Bank of America's equity and quant strategists noted in a report Wednesday that clients have been buying staples and communication-service stocks ahead of upcoming third-quarter earnings releases.
Dividends are clearly one reason for that. And if elevated bond yields continue to put pressure on the broader market, income-oriented stocks could help nervous investors sleep better at night.
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