sikiliza (87.27)

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Tired of All This Dividend Talk

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February 07, 2012 – Comments (7) | RELATED TICKERS: MO , DHY , AGNC

There has been a lot of talk lately about how investors are chasing yields and how dividend stocks are now in bubble territory as a result. The WSJ had an article comparing dividend stocks and bonds and Morgan Housel in his recent article titled “Dividend Bubble” went as far as to attach the “Bubble” moniker to stocks such as Altria and Consolidated Edison.

True, investors might be substituting asset classes in their income allocation, shifting from bonds, treasuries and munis to dividend stocks and funds. True, mREITs and their high yields have been drawing in income investors in the last couple years with yields as high as 22%. True, we have ETFs such as DHY and DHF with yields as high as 10-12% which with their stability are tantalizing targets for income seekers. However, when we contrast these with the broader market indices in the last year or so, we find that the S&P 500 lost 1.09% for full year 2011 while:

MO gained 21.57% with a 5.5% yield (Dividend-yielding stock)

AGNC lost 4.71% with a 19% yield (mREIT)

DHF was flat at 0.45% with a 10% yield (ETF/CEF)

My opinion on all this brouhaha is that many investors getting into dividend paying stocks like myself reasoned that it made sense to hedge against inflation in a low interest rate environment by making a few safe bets on steady, well managed dividend payers thereby at the very least preserving the value of their investments in the near term.

Per Morgan Housel, dividend payers have only gained 1.3% vs +8.3% for non-paying S&P 500 stocks YTD. My response to that is that dividend paying stocks tend to be low-beta and hence may underperform in rising markets, secondly a good number of dividend aristocrats and stars are old school conservertively ran enterprises and lastly, one month of data is hardly a trend to go by.

Disclosure: I am long AGNC, MO and DHY. Further, I of course picked the better performing dividend payers out there. There are a lot of dogs in this pile as well

7 Comments – Post Your Own

#1) On February 07, 2012 at 3:57 PM, awallejr (84.46) wrote:

Keep an eye on AGNC. They lowered their dividend to $1.25 a quarter from $1.40. Still a great return but I never like it when a company lowers the dividend. That starts to red flag the company.

As for the term "bubble" for some reason people are in love with that word and apply it to anything that increases in value. I like to buy into companies that pay a growing dividend for the reasons you do. It can never be a bubble unless valuations of the whole market are driven up to ridiculously high PEs. That hasn't been the case. The stock market is still relatively cheap even at current prices.

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#2) On February 07, 2012 at 4:14 PM, sikiliza (87.27) wrote:

@awallejr - I saw the AGNC announcement this morning. I am sure that there's a crowd out there holding on until the ex-div date and then looking to exit. Like you, I don't fancy companies that lower dividends. It's usually the first sign of trouble.

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#3) On February 07, 2012 at 4:19 PM, Hawmps (< 20) wrote:

Bubbles? I like bubbles, especially in the bath. There are great companies out there that sell products that make bubbles. No I'm not taking about AIG, BAC, or even Bear Sterns and all the derivatives and packaging/re-packaging of pennies to look more like gold bullion. I was thinking of Procter and Gamble or Colgate Palmolive. With products from either company you can make great bubbles with shampoo, body wash, or even dish soap. This is a very low risk bubble investment. It's almost a sure thing... just add water.

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#4) On February 07, 2012 at 4:36 PM, sikiliza (87.27) wrote:

@Hawmps - Nice!

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#5) On February 09, 2012 at 10:55 AM, dave22q (< 20) wrote:

sensible article. the risk in high yielders is never an inflated stock price it is a dividend cut. if you understand the companies you buy you are much safer that riding the latest hot sector. there are still risks but not that yield becomes unfashionable. these bubble stories are just silly.

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#6) On February 09, 2012 at 12:46 PM, MegaShort (99.96) wrote:

"the risk in high yielders is never an inflated stock price it is a dividend cut."

Sometimes it's an inflated stock price.

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#7) On February 14, 2012 at 1:50 PM, chk999 (99.99) wrote:

Well, like all investments, you have to try to figure out what could go wrong, but well run companies paying a good dividend that are purchased at an attractive price are going to be a tough hand to beat over the long run. I like looking at the historic dividend yield as one clue to whether a company is over or underpriced. But it is only one clue and you have to always look for the hidden surprise. The question isn't are we paranoid, it's are we paranoid enough?

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