With Q3 wrapping up last week, what did we learn from the market? One helpful form of analysis is to look at the best performing dividend stocks to see if any trends emerge. Our search for the 10 best dividend stocks of Q3 looked at dividend-paying stocks with market caps greater than $400 million and a current dividend yield of at least 2%. We also excluded stocks that received offers to be acquired.


The third quarter was marked by extreme market volatility compared to recent years, and the S&P 500 ended up dropping by more than 6%. As Q3 progressed, stock market volatility increased as macro data continued disappointing, capped off by last week’s underwhelming US payroll report.


According to an article by Bloomberg, the odds of the Fed increasing rates in October have plunged to a mere 10%, and markets are now pricing in the Fed to raise rates in March with two increases in each of the next two years. The odds of the Fed increasing rates at the December 2015 meeting sit just under 40%.


With reduced expectations for a looming rate increase, bonds and low-growth, high-yield dividend stocks were bid up. As seen below, global yields tumbled from about 1.2% at the end of June to less than 1% by the start of October.


Global Yields Fell


As rates fell, many dividend stocks did very well. The 10 stocks below recorded the highest total return during the period from June 30, 2015, to September 30, 2015. Let’s take a look at the biggest winners:


Top Ten Dividend Stocks During Q3


Not surprisingly, the list includes a handful of REITs, which are generally negatively correlated with interest rates over short time periods, and a couple of low-growth telecom companies.


Some of the stock-specific moves include BGS, which was bid up by the market after acquiring the Green Giant food brand; and RAI, which acquired Lorillard to further consolidate the North American tobacco market.


With Q3 in the past and lowered expectations for a rate increase only lasting so long, what will happen to dividend stocks once rates start to rise? Which stocks will sit on Q4’s best performing dividend stocks list?


Truthfully, no one knows for sure.


However, we can look at history to learn what happened to dividend stocks during past periods marked by rising rates.


We conducted a full study on the matter, which you can view here – Will rising interest rates hurt dividend stocks?


Essentially, the first few months immediately following a rate increase were marked with volatility and underperformance. Within one year, however, dividend payers who did not cut their dividends during the period had completely recovered and were well on their way to continued gains over the next two years.


As always, try to remain focused on long-term results. Anything can happen over the course of a few weeks or quarters.