Stock Study for Kids: What Happens to High-Dividend Stocks When Interest Rates Rise? The Rival Known as Bond Yields
Rising interest rates are a headwind for stocks.
When you invest in stocks, you might hear this phrase.
However,
If someone asks, “Why do interest rates affect stocks?”
it is surprisingly difficult to explain.
This time, we will look at one of the easiest ways to understand this,
the relationship between high-dividend stocks and bonds.
We will think about this.
The key point is,
investor money always has a rival.
That is what it comes down to.
First, what is a bond?
To put it very simply, a bond is
like a certificate of a loan.
For example, suppose the government asks,
“Please lend us 1 million yen.”
So you lend them 1 million yen.
Then the government will,
pay you back with interest.
That is how it works.
‘I will borrow this for X years. In return, I will pay a fixed interest rate every year.’
That is the promise made.
This is the basic concept of a government bond.
Of course, actual government bonds involve price fluctuations and interest rate changes, but for now, let’s think of it as:
‘Bonds = lending money and receiving interest in return.’
Let’s consider it this way.
Stocks also have ‘dividends’.
On the other hand, stocks have ‘dividends’.
For example,
you buy a stock for 1 million yen,
and you receive 50,000 yen in dividends per year.
In that case,
the dividend yield is 5%.
From an investor’s perspective,
‘I invest 1 million yen and receive 50,000 yen every year.’
That is what it amounts to.
Looking only at this,
‘5% is pretty good, isn’t it!’
you might think.
But what happens if ‘bond yields’ start to rise?
Here is a question for you.
Suppose that until now,
the yield on government bonds was 1%.
that is all.
On the other hand,
the dividend yield of high-dividend stocks was 5%.
In this case,
some people might think,
“I’ll take the risk of stock price fluctuations to aim for a 5% dividend.”
However,
what if the yield on government bonds rises to 3%?
Now,
people will think,
“I can get 3% even from government bonds?”
As a result,
the difference from the 5% high-dividend stock yield shrinks to,
5% – 3% = 2%.
In other words,
the “additional yield gained by holding stocks”
is shrinking.
becomes smaller.
High-dividend stocks have the problem of ‘stock price volatility’.
This is important.
Government bonds and stocks are not the same.
Stocks carry the risk of price declines.
For example,
You bought a stock with a 5% dividend for 1 million yen.
You received 50,000 yen in annual dividends.
But the stock price dropped by 20%.
Then,
even if you received 50,000 yen in dividends,
you would lose 200,000 yen due to the stock price decline.
On the other hand, while government bonds have price fluctuations, if you hold them until maturity, there are predetermined conditions for interest and principal.
In other words,
‘5% from stocks’
and
‘5% from bonds’
have different meanings even though they are both 5%.
Stocks carry risks such as corporate performance and stock price fluctuations.
So, what happens when ‘bond yields’ rise?
Investors are always thinking,
‘Where should I put my money?’
For example,
bank deposits,
bonds,
high-dividend stocks,
growth stocks,
real estate,
and so on.
From these options,
they consider,
‘How much return can I expect for the risk?’
When bond yields are low,
the option of,
‘In that case, I’ll get dividends from stocks’
becomes attractive.
But when bond yields rise,
it becomes,
‘I can get this much yield without even buying stocks.’
In other words,
This is why bonds become a ‘rival’ to high-dividend stocks.
‘Rising interest rates do not mean all high-dividend stocks will fall’
This is a point we want to avoid misunderstanding.
Just because interest rates have risen,
‘all high-dividend stocks will fall’
is not necessarily the case.
This is because the circumstances differ depending on the company.
For example,
banks.
Rising interest rates can affect lending rates and potentially improve the earnings environment.
On the other hand,
companies carrying a large amount of debt
may see an increase in interest payments due to rising interest rates.
Also,
if a company’s performance is growing significantly,
its stock price may rise even if interest rates go up.
In other words,
‘interest rates have risen’
don’t judge a stock based on this single piece of information alone; instead, ask,
‘What kind of impact does this have on that company?’
It is important to think about it this way.
Another important thing is ‘bond prices’.
I am going to talk about something a little difficult here.
Bonds have
a characteristic where
‘prices tend to fall when interest rates rise’.
For example,
suppose a bond issued in the past
was something that said, ‘You can get 10,000 yen in interest every year for 1 million yen’.
However, what if a newly issued bond says,
‘You can get 30,000 yen in interest every year for 1 million yen’?
The old bond that only gives 10,000 yen becomes a little less attractive.
Therefore, in the market,
a movement occurs to
‘make it possible to buy old bonds cheaply’.
As a result,
a relationship is created where
Interest rate rise↓Yield on newly issued bonds rises↓Price of previous low-yield bonds falls
is established.
This is the relationship that is created.
And it is also compared to “high-dividend stocks”.
From an investor’s perspective,
“bond yields”
and
“stock dividend yields”
are not exactly the same thing.
However,
“wanting to earn stable income”
is a goal for which they are sometimes compared.
For example,
government bond yield 1%
high-dividend stock 4%
let’s assume this is the case.
The difference is 3%.
However,
government bond yield 3%
high-dividend stock 4%
when it becomes this,
the difference is only 1%.
Then,
Investors might start thinking, ‘If the stock price could fall and the difference is only 1%, maybe bonds are fine.’
There is a possibility that investors will start thinking this way.
This is what is meant by
‘rising interest rates relatively decrease the appeal of high-dividend stocks.’
This is the story.
In fact, looking at the ‘yield gap’ is interesting.
There is a term you should remember here.
‘Yield spread.’
It sounds difficult, but the concept is simple.
By looking at the difference between the expected return on stocks and the yield on government bonds, there is a way of thinking that looks at
how much of a premium you get for holding stocks.
This is a way of thinking.
The Bank of Japan also presents the difference between the expected stock earnings yield and the 10-year government bond interest rate as the ‘yield spread’ in its Financial System Report. And as of the end of March 2026, it states that this gap has narrowed somewhat against the backdrop of rising interest rates.
In other words,
when looking at the appeal of stocks,
you shouldn’t just look at stocks,
but also consider the perspective of
‘how do they compare to bonds?’
This is also a perspective.
There is also that perspective.
Just because it’s a high-dividend stock doesn’t mean it’s safe
When looking at high-dividend stocks,
looking only at the number
‘5% dividend yield!’ is a bit dangerous.
This is because
bond yields also change.
Furthermore,
when stock prices fall, dividend yields rise.
For example,
a company that pays a 100 yen dividend per share.
If the stock price is 2,000 yen,
the dividend yield is 5%.
However, if the stock price drops to 1,500 yen,
the dividend yield becomes approximately 6.7%.
‘The yield went up!’
you might want to celebrate, but
in reality,
it might just be that ‘the yield looks high because the stock price fell’.
And, the reason the stock price fell might be,
that
Deteriorating business performance
Concerns about dividend cuts
High levels of debt
If these are present, you need to be careful.
What kind of companies should you look at when interest rates rise?
In a rising interest rate environment,
Instead of buying just because it’s a high-dividend stock,
you should also consider the perspective of,
Can this company withstand rising interest rates?
It is a perspective worth having.
For example,
Is it a company with a lot of debt?
How much is the interest payment burden?
Is the operating profit stable?
How is the cash flow?
Is the company forcing itself to pay dividends?
Has it cut dividends in the past?
Is the current dividend yield sufficiently higher than bond yields?
You should check these points.
Looking at interest rates changes how you view stocks slightly
When you start investing in stocks,
“This company has a low PER”
“The PBR is low”
“The dividend yield is high”
are things that catch your eye.
Of course, those are important too.
But before that,
try thinking, “What are interest rates like in the world right now?”
Consider that.
When interest rates are low,
“Money doesn’t grow much even if I put it in a savings account”
“Bond yields are also low”
is the kind of environment it becomes.
Then,
“I’ll buy stocks even if I have to take on some risk”
is a mindset that can make money move more easily.
Conversely, when interest rates rise,
“I can get a decent return without having to buy stocks”
is an option that emerges.
That is why interest rates are
It is like a ‘rival’ that comes from outside the stock market.
Today’s ‘Memo’
What you want to remember this time is,
‘When interest rates rise, bond yields also tend to rise.’
That is it.
And,
‘When bond yields rise, the appeal of high-dividend stocks can relatively decrease.’
That is it.
For example,
Bonds 1%
High-dividend stocks 5%
If so,
‘I might aim for 5% by holding stocks.’
Some people might think that.
But,
Bonds 4%
High-dividend stocks 5%
If so,
‘Even if I take the risk of stocks, is the extra gain only 1%…’
Some people will start to think that way.
In other words,
Do not just look at the dividend yield of stocks,
“How does it compare to bonds?”
It is important to think about this.
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