When interest rates go up, it’s not just your mortgage that feels the heat. They can quietly shake up investing strategies too, especially if you’re someone who relies on dividend-paying shares or ETFs. A change in rates can influence how appealing those dividends seem, how the companies behind them perform, and how your portfolio stacks up overall.

The good news? A rate rise doesn’t mean you need to run from your dividend investments. But it does mean it’s worth understanding what’s going on behind the scenes. So, let’s unpack what rising interest rates mean for dividend-focused investments. We’ll look at why some sectors get hit harder than others. We’ll also explore how to think about your portfolio when rates are climbing.

Why dividends matter to so many investors

Dividend-paying investments — or “dividend yielders” — are a pretty popular choice among Aussie investors. They’re often seen as steady, dependable, and relatively low maintenance. Instead of depending solely on share prices to deliver returns, you're also benefiting from a steady flow of income through dividend payments .

These investments can include:

• Established big-name companies that regularly pay dividends
• Dividend-focused ETFs , like VHY or IHD, which bundle together lots of high-dividend stocks
• LICs (listed investment companies) that often aim to deliver steady income through different market cycles

People like dividends for a few reasons:

• They can provide consistent income, which is handy if you’re retired or just like seeing money hit your account.
• Reinvesting dividends can be a great way to grow your investment faster.
• They can offer peace of mind — even when share prices drop, you’re still getting something back.

When interest rates rise, everything gets reshuffled

Interest rates and dividend yields might seem unrelated at first. But when the Reserve Bank of Australia (RBA) lifts rates (usually to try and control inflation), it changes the playing field.

Here’s why that matters:

• Suddenly, term deposits and savings accounts start offering higher returns. That makes the 4% dividend from your favourite share look a bit less exciting.
• Investors may decide to move money out of dividend shares and into cash or bonds . This shift in demand can cause share prices to drop, which pushes up the yield, but for the wrong reasons.
• Lower share prices mean paper losses, even if the dividend is still coming in.

Some sectors feel the pressure more than others

Not all dividend-paying shares react the same way to rising rates. It often depends on how much debt a company carries, how it makes its money, and how flexible it is with pricing.

Here are a few examples:

• REITs (real estate investment trusts) usually borrow heavily to buy properties. When rates rise, their borrowing costs go up, but rental income might not.
• Utilities and infrastructure companies also rely on debt and have fixed or regulated pricing. That makes it harder for them to pass on costs or grow profits quickly.
• Telcos tend to need a lot of ongoing investment, which can mean more borrowing.
• Banks are a mixed bag. Higher rates can help them make more money from loans, but they also tend to lend less when customers pull back on spending.

During the rate hikes from 2022 to 2024, REITs in particular took a hit. Share prices fell as investors worried about higher debt costs and lower property values.

Big yields can hide big risks

If you spot a dividend yield that looks a bit too good to be true — say, 8% or more — it’s worth digging a little deeper. In a rising-rate environment, high yields can sometimes signal trouble, not opportunity.

Keep an eye on:

• The payout ratio : This refers to how much of a company’s earnings it’s giving away as dividends. If it’s paying out 90% or more, there may not be much wiggle room if profits fall.
• Earnings pressure : Companies often face higher costs and slower sales when rates rise, which can make it harder to keep up their usual dividend payments.
• Dividend track record: Find out whether the company has a history of cutting dividends during tougher times.

Over the past couple of years, some businesses reduced or even stopped paying dividends to keep cash on hand. Others — particularly those with stronger balance sheets or more predictable revenue — held steady.

Inflation sneaks into the picture too

A lot of the time, interest rates rise in response to inflation , when the cost of living goes up and money doesn’t stretch as far. This can add another layer to the dividend conversation.

Here’s the issue:

• If inflation is 6% and your dividend yield is 4%, you’re losing ground in real terms.
• What matters most is the real yield — that’s your return after accounting for inflation.
• Companies that can raise prices (without losing customers) are better placed to keep up with inflation and potentially grow their dividends.

That’s why businesses with strong pricing power or inflation-linked contracts can be more attractive when both inflation and rates are high.

Looking at the past can help, but with a grain of salt

History doesn’t repeat itself, but it often rhymes. Previous rate hike cycles — like in the early 2000s or mid-2010s — show us that dividend-focused investments can lag in the short term, especially compared to growth stocks .

But when you zoom out, especially if you’re reinvesting your dividends , total returns can still stack up well over time. It just depends on your time horizon and what you're investing for — income now, or growth later.

So, no, rising rates don’t necessarily mean dividend investing is doomed. But they do mean you might want to be a bit more selective. And, as always, it pays to remember that performance isn't an indicator of future returns.

Where dividends fit in a well-balanced portfolio

Even if the outlook for dividends looks a bit shakier when rates are high, they can still play a valuable role in your portfolio.

Here’s how to think about it:

• Diversification matters: Dividend yielders often work best alongside growth shares, cash, bonds, and maybe even some alternative investments. It’s not all or nothing.
• You might consider rebalancing: If cash is now yielding 5%, you might shift some of your dividend-heavy holdings toward more stable income sources.
• Tax still counts: Australian investors get franking credits on many dividends, which can improve after-tax returns. This is particularly helpful for people in lower tax brackets or those drawing down in retirement.

Ultimately, dividends don’t have to be your only income source, but they can still be a useful one.

So… should you ditch dividend stocks when rates go up?

Not necessarily.

Yes, rising interest rates make life tougher for some dividend-paying investments. But that doesn’t mean they’re all bad news. Some hold up well. Others struggle. It depends on the company, the sector, the economy, and your goals and investing preferences.

If you’re in it for long-term income or you're a fan of compounding , dividend yielders can still earn their place in your portfolio. You might just need to tune your expectations, check your risk, and maybe spread your bets a bit wider than you used to.

What this could mean for your investing strategy

Rising interest rates can take some shine off dividend investments, but they don’t make them irrelevant. What matters is how those dividends are generated, how reliable they are, and how they fit with the rest of your strategy.

It’s all about balance. Understanding the trade-offs, doing your homework, and keeping an eye on the bigger picture will always get you further than chasing yields or reacting to headlines.

Dividends may not always be exciting, but when used thoughtfully, they can still be a powerful part of growing long-term wealth, whatever the interest rate.

Happy investing!