Wall St falls as bond yields hit high dividend stocks

Yields have risen since Bernanke raised fears that Fed would curb bond-buying program sooner than expected

US stocks fell on Wednesday as high-yielding dividend stocks lost some of their luster after recent gains in US Treasury bond yields.

Benchmark Treasury yields overnight hit 2.235% - the highest in more than a year - and have risen since last week when Federal Reserve Chairman Ben Bernanke raised fears that the Fed would curb its bond-buying program sooner than most people expected.

Indexes made up of consumer staples, health care, telecommunications and utilities shares - S&P 500 sectors that include many stocks that pay high dividends - all slid more than 1%. Johnson & Johnson , down 2.2% at $85.65, was the biggest drag on the S&P 500.

"The recent rise in interest rates on the 10-year bond over the past few sessions has finally caught up with some of this year's market leaders," said Michael Sheldon, chief market strategist for RDM Financial in Westport, Connecticut, adding that investors were cashing in profits.

The defensive sectors have led the gains in this year's market rally as investors favored high-dividend stocks over fixed-income securities in a low interest-rate environment.

The spread between the S&P 500 dividend yield and the 10-year US Treasury note's yield is at its narrowest in about a year. The S&P 500 dividend yield was about 2.39% near Wednesday's close.

Shares of Fannie Mae and Freddie Mac dropped sharply in heavy volume, reversing sharp early gains. Shares of Fannie Mae plunged 28.9% to $2.90, with about 272 billion shares traded, while shares of Freddie Mac sank 30.4% to $2.61, with 119 billion shares traded.

Fund manager Bruce Berkowitz's Fairholme Capital Management is making a big bet on preferred shares of Fannie Mae and Freddie Mac, CNBC reported. Until Wednesday's pullback, Fannie Mae's and Freddie Mac's shares had risen for seven straight days.

The Dow Jones industrial average slid 106.59 points, or 0.69%, to close at 15,302.80. The Standard & Poor's 500 Index  dropped 11.70 points, or 0.70%, to finish at 1,648.36. The Nasdaq Composite Index fell 21.37 points, or 0.61%, to end at 3,467.52.

Both the S&P telecoms sector index and the S&P utilities sector index fell 1.5%. The S&P consumer staples index tumbled 1.9% while the S&P health care index declined 1.5%.

At the same time, the iShares Barclays 20+ Year Treasury Bond exchange-traded fund added 1.1%, bouncing back from a drop of 2.6% on Tuesday.

Loose monetary policies by central banks around the world have lifted stock markets, driving both the Dow and the S&P 500 to record highs this year.

The S&P 500 is up 15.6% from its close at the end of 2012.

Among the day's gainers, Smithfield Foods surged 28.4% to $33.35 after China's Shuanghui Group agreed to buy the company for $34 a share.

SLM Corp rose 2.2% to $23.48 after the student loan provider said it would split the company into two publicly traded entities. The company named John Remondi as its chief executive officer.

Volume was roughly 6.7 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, slightly above the average daily closing volume of about 6.4 billion this year.

Decliners outpaced advancers on the NYSE by a ratio of nearly 4 to 1. On the Nasdaq, about 17 stocks fell for every eight that rose.