It seems almost oxymoronic, but dividend-paying stocks are hot. Income-producing stocks dramatically outperformed non-dividend-payers in 2011's quality-conscious market environment, and dividend-focused ETFs and mutual funds have been gathering assets at a good clip.
'Dead Money At Best' Other posters were less sanguine about dividend-payers at current prices.
FredinWhiteRock wrote, "Good-value blue chip dividend paying stocks were in abundance three months ago. Today, they have appreciated 10 to 20% and look fairly valued to me. I don't see any capital upside now because there is no near-term growth in revenue and earnings. Most of these stocks look like dead money at best except for their dividends."
Duanej isn't unloading his dividend payers but has taken note of their price jumps. "Many of the big-cap stocks on my watch list traded as low as 8x to 15x trailing earnings last fall. Today, after a nice rebound, those multiples are more like 12x to 20x. Not pricey enough to warrant selling, in my mind, but certainly the expected future returns are not as high as they were a few months ago."
Academic thinks the whole market is pricey, dividend-payers included, and that income-producing equities could be vulnerable if interest rates increase. "Personally I think stocks in general, including dividend stocks, are overvalued. One needs to keep in mind that the dividend yield on the total market (e.g., Fidelity Spartan Total Stock Market Index ) is only 1.7%, and that there is usually a good reason why any particular stock yields much more than the average. That 1.7% yield would start to look awfully puny if interest rates were to climb back above 5%."
"But," Academic went on, "it seems silly to refer to a category with a P/E between 10 and 15 as heading towards a 'bubble.' Even if you account for historically elevated profit margins, the valuation of these stocks is nowhere near bubble territory. Furthermore, the mindset that leads people to invest in dividend stocks is not a mindset that would tend to push the valuations far higher (with the yields far lower). Overvalued, yes. Headed towards a bubble, no."
Sws1967 shares academic's concern about what rising interest rates could mean to dividend-payers. "[W]hat does happen when interest rates DO rise and it makes sense to go back to bonds? Will all/some of those people move back to bonds? The other case is someone who has fled from growth stocks to dividend stocks--I hear this talked about less than people looking for yield turning to dividends vs. bonds. I am concerned that big money managers may have allocated from growth to dividends and could easily switch back to growth, once a clearer picture of the recovery unfolds."
'All Dividend Payers Are Not Alike' Several posters noted that it's not helpful to think of dividend-payers as a monolith: You have to evaluate each security on its own merits.
Nancyh wrote, "Discussing dividend-payers as a category doesn't make sense. One of the key lessons I've learned is to buy an individual company at a discount to its fair value. I find Josh Peters 'dividend buy price' very helpful, as well as Morningstar's discount to fair value. This makes dips in the market a strategic opportunity rather than a cause for mind-numbing panic."
MrBanjo also relies on a number of different data points to identify individual companies that look good from a variety of angles--business fundamentals as well as valuations and yield. "I usually buy shares of dividend payers at or below M* 'consider buying' price with decent cash flows. [This a]llows for breathing room. [They're g]etting harder to find now, but the discipline keeps me out of trouble. "
DaveD82 sees room for upside in wide-moat dividend-paying companies, despite recently strong performance. "[They] are likely very close to fair value. However, this simply implies that the future expected returns should equate to the discount rate on all future cash flows, which is probably around 7%-9%. On top of this, you could easily find many companies in this category with dividend yields around 3% and growing with free cash flow to support this growth. With all of the uncertainty in the world regarding both economic and political factors, owning these kinds of businesses with this return profile is still very attractive."
Cardinal thinks dividend-focused investors should be safe as long as their picks "are priced below their fair value number, are not priced at or near their 12 month high, and have healthy free cash flows."
In the current environment, VALUEINVESTOR's stock-picking criteria are as follows: "Mega Cap, multinational, low debt to capital, low dividend payout ratio, average to slightly above average yield, history of dividend growth. Generally speaking I think right now these are the safest stocks to be buying (as a group)." Examples of companies that currently fit this investor's criteria are Procter & Gamble displayPTip('PG', 'PG','YTD', '', '', '', '', '', '','msg','P');, PepsiCo displayPTip('PEP', 'PEP','YTD', '', '', '', '', '', '','msg','P');, 3M displayPTip('MMM', 'MMM','YTD', '', '', '', '', '', '','msg','P');, Novartis displayPTip('NVS', 'NVS','YTD', '', '', '', '', '', '','msg','P');, Microsoft displayPTip('MSFT', 'MSFT','YTD', '', '', '', '', '', '','msg','P');, and Intel displayPTip('INTC', 'INTC','YTD', '', '', '', '', '', '','msg','P');. VALUEINVESTOR calls these names "modestly undervalued, definitely not a bubble."
Bizman concurred that it's important to do your homework and pick your spots. "I have no interest in the big financials who will suffer from deleveraging and the regulatory climate for years to come. And who really believes or even understands their balance sheets these days with all of the repo and derivative footnotes and off-balance-sheet liability nonsense that render them almost meaningless? [I'm n]ot interested in deep cyclical, either, as their dividends are also in the most-likely-to-be-cut-in-a-downturn category."
Rforno agreed with bizman: Avoid financials. "As for me, I continue to stay far far away from any bank stocks, preferred or otherwise. [They m]ay have nice dividends but the sector still stinks to me."
Rathgar believes that defensive stocks are the ones to avoid right now. "Dividend stocks/funds seem to be fairly or undervalued; however, the defensive area such as consumer stables and utilities seems to be overvalued."
Bobk47 agreed that utilities aren't particularly attractive at current levels. "[Utilities] strike me as overvalued unless you believe present interest rates will remain unchanged for many, many years. Conversely, many health-care stocks are very close to my buy prices."
Rforno cautions that investors who shop based on yield alone--without doing their homework and without being selective--are likely to get burned. "I think the 'bubble' in dividends is in ETFs that cater to dividend seekers--i.e., the one-stop-shop for folks yield hunting who don't want (or can't) do their own due diligence on individual names. As I recall their inflows have exploded in recent months. I think the uninitiated continue to screen for 'max yield' without thinking things through first, which can be dangerous. They hear 'dividends are safe' and take that simple statement as assurance that whatever they buy that pays a big divvie won't ever go down."
See More Articles by Christine Benz
30-Minute Money Solutions Need help picking up the pieces in this turbulent market? 30-Minute Money Solutions by Morningstar director of personal finance Christine Benz simplifies the daunting task of getting your financial house in order. Written for novice and experienced investors alike, this book offers manageable, step-by-step solutions for tackling money challenges and building a comprehensive financial plan in simple 30-minute increments. Learn more. Order Your Copy Today--$16.95It's easy to see the appeal. Still reeling from accounting frauds and the bursting of two bubbles in the space of a decade, many investors view a company's ability to pay a dividend as an important demonstration of financial strength and stability. And although the risk profiles of stocks and bonds are completely different, some yield-starved investors have viewed dividend-payers as an attractive alternative to bonds, given the latter's low payouts and potential vulnerability in the face of rising interest rates.
But is there a risk that dividend-paying stocks could become too popular, forcing up valuations and pushing down yields? I recently posed that question in the Income & Dividend Investing forum of Morningstar.com. Responses showcased a range of opinions on the topic: While nearly all posters agreed that the stocks are not in bubble territory, even some dividend fans conceded that yield-rich stocks aren't nearly as attractive as they were a year ago. Many other posters took pains to note that dividend-payers are far from a monolith; successful investors need to pick their spots.
To read the complete thread or share your own opinions, click here.
'Dividends Are Timeless' In response to my query about whether dividends are in a bubble, poster NoPanic was emphatic. "I think not! Many dividend paying stocks are still very undervalued in my opinion. Take General Electric displayPTip('GE', 'GE','YTD', '', '', '', '', '', '','msg','P'); as an example. This great company still has plenty of forward price and dividend opportunity as do some natural gas partnerships such as Energy Transfer Equity displayPTip('ETE', 'ETE','YTD', '', '', '', '', '', '','msg','P');."
Bnorthrop also scoffed at the notion that dividend-payers are nearing bubble territory. "Bubble? Hah! We're nowhere near nosebleed territory (e.g., Vanguard Dividend Appreciation displayPTip('VIG', 'VIG','YTD', '', '', '', '', '', '','msg','P'); has a P/E of 12.03--plenty of oxygen). The only existential danger is whether popularity becomes a fad. But fads don't last, and popularity comes and goes. What remains is the Steady Eddie dividend payers who, despite their unassuming personality, quietly rule the world."
Nor is FidlStix worried--yet. "I'd say dividend payers are marching toward the mean (fairly valued) instead of breezing toward a bubble (overvalued)."
Wienkeg agreed. "Bubble, to me, means wondering why someone is paying that much for something. Stock [trading at] 100 times earnings = Internet bubble. House built for $100K sold for $300K = housing bubble. Locking up money for 10 years at 1.8% when inflation is 3% = Treasury bubble. Dividend payers are not in bubble territory yet. I'll let you know when I see it."
Chief K acknowledged that just because dividend-payers aren't screamingly cheap right now, they can still be attractive. "Any time an investment becomes popular it's going to be very hard to continue to call it undervalued. However, buying something for fair value isn't the end of the world--in fact buying things at a fair price describes almost every financial transaction of my life. Bargains are rare and precious and I love finding them, but they are rare."
Using dividends as a rough proxy for valuation, HERBSCORE thinks dividend-payers may still have some gas left in the tank. "When I look around at some of the MLPs, health/medical and real estate REITs, telecom, utility, intermediate term bonds, and energy stocks I still see attractive yields. Even big-cap equities are yielding 2% to upwards of 4% and offer good total returns. How attractive these stocks are depends on your risk appetite, of course."
Poster sws1967 agrees with HERBSCORE: If dividend payers' valuations were a concern, yields would be lower than they are right now. (A stock's dividend yield consists of its dividend per share divided by the current share price, so when share prices are up, yields are down.) "You can look at these individual companies and compare their P/E ratios, look at their yields, and at today's prices I don't see that they've shot so far up in price that the yields have dropped. When/IF that happens--the price increasing enough to reduce the yield significantly--you can look for a bubble, but I don't see a bubble now. I just see people being rational and putting their money to work in a consistent, rewarding vehicle...probably where it should have been for the last 10 years anyway!"
Other posters stated flatly that they're not particularly concerned with the valuations of their dividend-paying stocks. As long as their holdings remain on solid financial footing and continue to show them the money, they're content.
BuyerBeWare wrote, "The nice thing about dividend paying companies is that they strive to pay dividends, and strive to increase dividends. The share price is not something anyone should focus on... Share prices will always go up and down, but the dividends should keep on coming and keep on rising. Sell when the company starts lowering or suspending dividends and when the entity becomes unstable."
EnvEng proclaimed: "I don't care all that much about share price if the dividend is good and safe."
ElLobo concurred, arguing that a dividend cut should be a bigger concern for investors than the stocks' valuations. Through that lens, "dividend-paying stocks had their bubble burst back in 2007-2009, whenever companies cut, or eliminated, their dividends"¦ I don't see the same risk, today, in future cuts in dividend payouts."
Poster povdds agreed that steady dividend payouts are important, but noted that investors need to be holistic in their evaluations. "[D]ividends are one part of the pie chart but not the only part. Dividends do potentially represent a tangible benefit and the sign of a well-run company, but payouts, future and current earnings (good luck on that one), and future stumbles have more to do with your relative risk and gain than absolute dividend payout."
'You Can't Fake a Dividend' While few posters were willing to stick their necks out and call dividend-payers cheap, several argued that the fundamental case for income-producing stocks is very much intact; therefore, they're not particularly worried about valuation at this time.
Cliff opined, "I don't know that it's so much a matter of being enthused about dividends as it is recognizing their historical importance to long-term returns. Especially those cash payouts from enterprises that have both a track record for growing those payouts and prospects for future growth."
JusticeMann1 concurred, "It seems that unless you can pick the next Baidu displayPTip('BIDU', 'BIDU','YTD', '', '', '', '', '', '','msg','P'); [a Chinese Internet firm whose share price has soared], the rest of the equities market seems like a rigged game for the small investor. Therefore, solid dividend payers and MLPs with reinvested dividends seem the only strategy that really works for a long-term investor who doesn't have access to a hedge fund."
Rathgar believes that dividends are one of the best gauges of a company's financial strength, noting, "I like the saying, 'You can't fake a dividend.' It means the company has excess cash after paying all expenses. Stronger profitable companies tend to pay dividends so in this sense dividends are timeless."
Another oft-mentioned theme was that demographic trends--specifically, the swell of Baby Boomers retiring in the years ahead--should stoke strong demand for dividend-paying stocks, particularly given that bond returns are expected to be muted. Nancyh summed up the bull case as follows: "Macro forces working for dividend-payers include pressure on companies to increase payouts; retirees flooding the market for years to come; and growing awareness that bonds may be overvalued and often are also subject to market forces."
Bizman amplified Nancy's point that dividends could become more plentiful in the future. "Why shouldn't a lot more companies share the wealth with their owners? The average dividend yield and payout is low compared to history before the last 20 years or so. We could be in the early innings in terms of companies that can easily afford it (big cash flows and huge hoards of cash on their balance sheets) deciding the thing to do is to pay a dividend at a 40-50% payout ratio."
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PERSONALFINANCE USA_FSTMX,USA_MMM,USA_INTC,USA_PEP,USA_GE,USA_PG,USA_MSFT,USA_ETE,USA_NVS,USA_BIDU,USA_VIG FO_USA_FSTMX E0_USA_MMM E0_USA_INTC E0_USA_PEP E0_USA_GE E0_USA_PG E0_USA_MSFT E0_USA_ETE E0_USA_NVS E0_USA_BIDU FE_USA_VIG &primaryKeyword=PERSONALFINANCE 2 {CommentWebService} .bloomreach-wrap a { color: #000000; text-decoration: none; } .bloomreach-wrap a:hover{ text-decoration: underline; } .bloomreach-wrap { text-align:left; padding-left:5px; margin:15px 0px 0px 4px; padding-top:15px; width: 370px; } .br-related-heading, .br-related-query, .br-found-heading, .br-sf-widget { border-bottom: 1px solid #CCCCCC; font-size: 11px; line-height: 15px; padding: 5px 0 5px; } .br-related-heading, .br-found-heading { border-top: 2px solid #999999; font-weight: bold; padding: 2px 0 7px; color:#333333; } .br-found-heading { margin-top:30px; } .br-sf-widget-merchant-desc { color: #999999; padding-top:6px; } var br_related_rid = "Rbjsn2yz9dr9fxpowhe4t-uf,r0,m0"; $(".br-sf-widget-merchant-qv").remove(); $(".br-sf-widget-merchant-img").remove(); $(".br-sf-widget").next("div[id^='br']").remove(); if($(".bloomreach-wrap #BloomreachWidgetProxy").length>0){ $(".bloomreach-wrap #BloomreachWidgetProxy").css("display","block"); } else{ if($("#BloomreachWidget").length>0){ document.getElementById("BloomreachWidget").innerHTML=$("#BloomreachWidgetProxy").html(); $("#BloomreachWidgetProxy").remove(); } } .br-related-heading, .br-found-heading { border-top: 3px solid #666666; font-weight: bold; font-size:10px; padding: 2px 0 7px; color:#000000; } OAS_AD('Bottom'); Content Partners Site Directory Site Map Our Products Corrections Help Advertising Opportunities Licensing Opportunities Glossary RSS Mobile Portfolio Affiliate Careers Company News International Sites: Australia Canada China France Germany Hong Kong Italy The Netherlands Norway Spain U.K. Switzerland Independent. Insightful. Trusted. Morningstar provides stock market analysis; equity, mutual fund, and ETF research, ratings, and picks; portfolio tools; and option, hedge fund, IRA, 401k, and 529 plan research. Our reliable data and analysis can help both experienced enthusiasts and newcomers. © Copyright 2012 Morningstar, Inc. All rights reserved. Please read our Terms of Useand Privacy Policy.Dow Jones Industrial Average, S&P 500, Nasdaq, and Morningstar Index (Market Barometer) quotes are real-time. var HeaderBox = initBoxQuote("AutoCompleteBox","AutoCompleteDropDown"); HeaderBox.IdleDisplayMsg = ""; HeaderBox.LocalRegion="USA"; HeaderBox.SetPreference('USA','EN',32); var FooterBox = initBoxQuote("AutoCompleteBoxFooter","AutoCompleteDropDownFooter"); FooterBox.IdleDisplayMsg = ""; FooterBox.LocalRegion="USA"; FooterBox.SetPreference('USA','EN',32); //clears all content/image boxes-------------------------------------------------------------------------------------- var imageIDs=new Array('siteDirectoryContent', 'siteMapContent', 'productsContent'); //content boxes .mi_row3{display: none} var _gaq = _gaq || []; _gaq.push(['_setAccount', 'UA-16669347-1']); _gaq.push(['_setDomainName', '.morningstar.com']); _gaq.push(['_trackPageview']); (function() { var ga = document.createElement('script'); ga.type = 'text/javascript'; ga.async = true; ga.src = ('https:' == document.location.protocol ? 'https://ssl' : 'http://www') + '.google-analytics.com/ga.js'; var s = document.getElementsByTagName('script')[0]; s.parentNode.insertBefore(ga, s); })(); var Name = $('meta[name=DC.Creator]').attr("content").split(','); var Title = $('meta[name=DC.Title]').attr("content"); var URL = window.location.href; var Author = Name[1] + " " + Name[0]; var PubDate = $('meta[name=DC.Date]').attr("content"); _gaq.push(['_trackEvent', 'Article Title From Morningstar', Title, URL]); _gaq.push(['_trackEvent', 'Author Name From Morningstar', Author, URL]); _gaq.push(['_trackEvent', 'Article URL From Morningstar', URL, Title + "(by " + Author + " on " + PubDate + ")"]); _gaq.push(['_trackEvent', 'Publish Date From Morningstar', PubDate, URL]); _gaq.push(['_trackEvent', 'Article Title', Title, URL]); _gaq.push(['_trackEvent', 'Author Name', Author, URL]); _gaq.push(['_trackEvent', 'Article URL', URL, Title + "(by " + Author + " on " + PubDate + ")"]); _gaq.push(['_trackEvent', 'Publish Date', PubDate, URL]);"But," Academic went on, "it seems silly to refer to a category with a P/E between 10 and 15 as heading towards a 'bubble.' Even if you account for historically elevated profit margins, the valuation of these stocks is nowhere near bubble territory. Furthermore, the mindset that leads people to invest in dividend stocks is not a mindset that would tend to push the valuations far higher (with the yields far lower). Overvalued, yes. Headed towards a bubble, no."
Sws1967 shares academic's concern about what rising interest rates could mean to dividend-payers. "[W]hat does happen when interest rates DO rise and it makes sense to go back to bonds? Will all/some of those people move back to bonds? The other case is someone who has fled from growth stocks to dividend stocks--I hear this talked about less than people looking for yield turning to dividends vs. bonds. I am concerned that big money managers may have allocated from growth to dividends and could easily switch back to growth, once a clearer picture of the recovery unfolds."
'All Dividend Payers Are Not Alike' Several posters noted that it's not helpful to think of dividend-payers as a monolith: You have to evaluate each security on its own merits.
Nancyh wrote, "Discussing dividend-payers as a category doesn't make sense. One of the key lessons I've learned is to buy an individual company at a discount to its fair value. I find Josh Peters 'dividend buy price' very helpful, as well as Morningstar's discount to fair value. This makes dips in the market a strategic opportunity rather than a cause for mind-numbing panic."
MrBanjo also relies on a number of different data points to identify individual companies that look good from a variety of angles--business fundamentals as well as valuations and yield. "I usually buy shares of dividend payers at or below M* 'consider buying' price with decent cash flows. [This a]llows for breathing room. [They're g]etting harder to find now, but the discipline keeps me out of trouble. "
DaveD82 sees room for upside in wide-moat dividend-paying companies, despite recently strong performance. "[They] are likely very close to fair value. However, this simply implies that the future expected returns should equate to the discount rate on all future cash flows, which is probably around 7%-9%. On top of this, you could easily find many companies in this category with dividend yields around 3% and growing with free cash flow to support this growth. With all of the uncertainty in the world regarding both economic and political factors, owning these kinds of businesses with this return profile is still very attractive."
Cardinal thinks dividend-focused investors should be safe as long as their picks "are priced below their fair value number, are not priced at or near their 12 month high, and have healthy free cash flows."
In the current environment, VALUEINVESTOR's stock-picking criteria are as follows: "Mega Cap, multinational, low debt to capital, low dividend payout ratio, average to slightly above average yield, history of dividend growth. Generally speaking I think right now these are the safest stocks to be buying (as a group)." Examples of companies that currently fit this investor's criteria are Procter & Gamble , PepsiCo displayPTip('PEP', 'PEP','YTD', '', '', '', '', '', '','msg','P');, 3M displayPTip('MMM', 'MMM','YTD', '', '', '', '', '', '','msg','P');, Novartis displayPTip('NVS', 'NVS','YTD', '', '', '', '', '', '','msg','P');, Microsoft displayPTip('MSFT', 'MSFT','YTD', '', '', '', '', '', '','msg','P');, and Intel displayPTip('INTC', 'INTC','YTD', '', '', '', '', '', '','msg','P');. VALUEINVESTOR calls these names "modestly undervalued, definitely not a bubble."
Bizman concurred that it's important to do your homework and pick your spots. "I have no interest in the big financials who will suffer from deleveraging and the regulatory climate for years to come. And who really believes or even understands their balance sheets these days with all of the repo and derivative footnotes and off-balance-sheet liability nonsense that render them almost meaningless? [I'm n]ot interested in deep cyclical, either, as their dividends are also in the most-likely-to-be-cut-in-a-downturn category."
Rforno agreed with bizman: Avoid financials. "As for me, I continue to stay far far away from any bank stocks, preferred or otherwise. [They m]ay have nice dividends but the sector still stinks to me."
Rathgar believes that defensive stocks are the ones to avoid right now. "Dividend stocks/funds seem to be fairly or undervalued; however, the defensive area such as consumer stables and utilities seems to be overvalued."
Bobk47 agreed that utilities aren't particularly attractive at current levels. "[Utilities] strike me as overvalued unless you believe present interest rates will remain unchanged for many, many years. Conversely, many health-care stocks are very close to my buy prices."
Rforno cautions that investors who shop based on yield alone--without doing their homework and without being selective--are likely to get burned. "I think the 'bubble' in dividends is in ETFs that cater to dividend seekers--i.e., the one-stop-shop for folks yield hunting who don't want (or can't) do their own due diligence on individual names. As I recall their inflows have exploded in recent months. I think the uninitiated continue to screen for 'max yield' without thinking things through first, which can be dangerous. They hear 'dividends are safe' and take that simple statement as assurance that whatever they buy that pays a big divvie won't ever go down."
See More Articles by Christine Benz
30-Minute Money Solutions Need help picking up the pieces in this turbulent market? 30-Minute Money Solutions by Morningstar director of personal finance Christine Benz simplifies the daunting task of getting your financial house in order. Written for novice and experienced investors alike, this book offers manageable, step-by-step solutions for tackling money challenges and building a comprehensive financial plan in simple 30-minute increments. Learn more. Order Your Copy Today--$16.95It's easy to see the appeal. Still reeling from accounting frauds and the bursting of two bubbles in the space of a decade, many investors view a company's ability to pay a dividend as an important demonstration of financial strength and stability. And although the risk profiles of stocks and bonds are completely different, some yield-starved investors have viewed dividend-payers as an attractive alternative to bonds, given the latter's low payouts and potential vulnerability in the face of rising interest rates.
But is there a risk that dividend-paying stocks could become too popular, forcing up valuations and pushing down yields? I recently posed that question in the Income & Dividend Investing forum of Morningstar.com. Responses showcased a range of opinions on the topic: While nearly all posters agreed that the stocks are not in bubble territory, even some dividend fans conceded that yield-rich stocks aren't nearly as attractive as they were a year ago. Many other posters took pains to note that dividend-payers are far from a monolith; successful investors need to pick their spots.
To read the complete thread or share your own opinions, click here.
'Dividends Are Timeless' In response to my query about whether dividends are in a bubble, poster NoPanic was emphatic. "I think not! Many dividend paying stocks are still very undervalued in my opinion. Take General Electric displayPTip('GE', 'GE','YTD', '', '', '', '', '', '','msg','P'); as an example. This great company still has plenty of forward price and dividend opportunity as do some natural gas partnerships such as Energy Transfer Equity displayPTip('ETE', 'ETE','YTD', '', '', '', '', '', '','msg','P');."
Bnorthrop also scoffed at the notion that dividend-payers are nearing bubble territory. "Bubble? Hah! We're nowhere near nosebleed territory (e.g., Vanguard Dividend Appreciation displayPTip('VIG', 'VIG','YTD', '', '', '', '', '', '','msg','P'); has a P/E of 12.03--plenty of oxygen). The only existential danger is whether popularity becomes a fad. But fads don't last, and popularity comes and goes. What remains is the Steady Eddie dividend payers who, despite their unassuming personality, quietly rule the world."
Nor is FidlStix worried--yet. "I'd say dividend payers are marching toward the mean (fairly valued) instead of breezing toward a bubble (overvalued)."
Wienkeg agreed. "Bubble, to me, means wondering why someone is paying that much for something. Stock [trading at] 100 times earnings = Internet bubble. House built for $100K sold for $300K = housing bubble. Locking up money for 10 years at 1.8% when inflation is 3% = Treasury bubble. Dividend payers are not in bubble territory yet. I'll let you know when I see it."
Chief K acknowledged that just because dividend-payers aren't screamingly cheap right now, they can still be attractive. "Any time an investment becomes popular it's going to be very hard to continue to call it undervalued. However, buying something for fair value isn't the end of the world--in fact buying things at a fair price describes almost every financial transaction of my life. Bargains are rare and precious and I love finding them, but they are rare."
Using dividends as a rough proxy for valuation, HERBSCORE thinks dividend-payers may still have some gas left in the tank. "When I look around at some of the MLPs, health/medical and real estate REITs, telecom, utility, intermediate term bonds, and energy stocks I still see attractive yields. Even big-cap equities are yielding 2% to upwards of 4% and offer good total returns. How attractive these stocks are depends on your risk appetite, of course."
Poster sws1967 agrees with HERBSCORE: If dividend payers' valuations were a concern, yields would be lower than they are right now. (A stock's dividend yield consists of its dividend per share divided by the current share price, so when share prices are up, yields are down.) "You can look at these individual companies and compare their P/E ratios, look at their yields, and at today's prices I don't see that they've shot so far up in price that the yields have dropped. When/IF that happens--the price increasing enough to reduce the yield significantly--you can look for a bubble, but I don't see a bubble now. I just see people being rational and putting their money to work in a consistent, rewarding vehicle...probably where it should have been for the last 10 years anyway!"
Other posters stated flatly that they're not particularly concerned with the valuations of their dividend-paying stocks. As long as their holdings remain on solid financial footing and continue to show them the money, they're content.
BuyerBeWare wrote, "The nice thing about dividend paying companies is that they strive to pay dividends, and strive to increase dividends. The share price is not something anyone should focus on... Share prices will always go up and down, but the dividends should keep on coming and keep on rising. Sell when the company starts lowering or suspending dividends and when the entity becomes unstable."
EnvEng proclaimed: "I don't care all that much about share price if the dividend is good and safe."
ElLobo concurred, arguing that a dividend cut should be a bigger concern for investors than the stocks' valuations. Through that lens, "dividend-paying stocks had their bubble burst back in 2007-2009, whenever companies cut, or eliminated, their dividends"¦ I don't see the same risk, today, in future cuts in dividend payouts."
Poster povdds agreed that steady dividend payouts are important, but noted that investors need to be holistic in their evaluations. "[D]ividends are one part of the pie chart but not the only part. Dividends do potentially represent a tangible benefit and the sign of a well-run company, but payouts, future and current earnings (good luck on that one), and future stumbles have more to do with your relative risk and gain than absolute dividend payout."
'You Can't Fake a Dividend' While few posters were willing to stick their necks out and call dividend-payers cheap, several argued that the fundamental case for income-producing stocks is very much intact; therefore, they're not particularly worried about valuation at this time.
Cliff opined, "I don't know that it's so much a matter of being enthused about dividends as it is recognizing their historical importance to long-term returns. Especially those cash payouts from enterprises that have both a track record for growing those payouts and prospects for future growth."
JusticeMann1 concurred, "It seems that unless you can pick the next Baidu displayPTip('BIDU', 'BIDU','YTD', '', '', '', '', '', '','msg','P'); [a Chinese Internet firm whose share price has soared], the rest of the equities market seems like a rigged game for the small investor. Therefore, solid dividend payers and MLPs with reinvested dividends seem the only strategy that really works for a long-term investor who doesn't have access to a hedge fund."
Rathgar believes that dividends are one of the best gauges of a company's financial strength, noting, "I like the saying, 'You can't fake a dividend.' It means the company has excess cash after paying all expenses. Stronger profitable companies tend to pay dividends so in this sense dividends are timeless."
Another oft-mentioned theme was that demographic trends--specifically, the swell of Baby Boomers retiring in the years ahead--should stoke strong demand for dividend-paying stocks, particularly given that bond returns are expected to be muted. Nancyh summed up the bull case as follows: "Macro forces working for dividend-payers include pressure on companies to increase payouts; retirees flooding the market for years to come; and growing awareness that bonds may be overvalued and often are also subject to market forces."
Bizman amplified Nancy's point that dividends could become more plentiful in the future. "Why shouldn't a lot more companies share the wealth with their owners? The average dividend yield and payout is low compared to history before the last 20 years or so. We could be in the early innings in terms of companies that can easily afford it (big cash flows and huge hoards of cash on their balance sheets) deciding the thing to do is to pay a dividend at a 40-50% payout ratio."
Return to DiscussNext21PrevBe Seen. Be Heard. Become a Morningstar Contributor.Reach a readership of advisors, professionals, and active investors. Submit your commentaries for publication on Morningstar.com.
Securities mentioned in this article Ticker Price($) Change(%) Morningstar Rating Morningstar Analyst Report With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies. Video Reports On the Radar for 2012 More Videos... Most Popular Related News Also in Investing Specialists Avoiding Bond Market Woes Doesn't Come Without Trade-offsIndexing and the Average Active ManagerConsumers Make More, Save More, Potentially Fueling Growth Sponsored Links Buy a Link Now Sponsor Center Please Wait... 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"I have no interest in the big financials who will suffer from deleveraging and the regulatory climate for years to come. And who really believes or even understands their balance sheets these days with all of the repo and derivative footnotes and off-balance-sheet liability nonsense that render them almost meaningless? [I'm n]ot interested in deep cyclical, either, as their dividends are also in the most-likely-to-be-cut-in-a-downturn category."
Rforno agreed with bizman: Avoid financials. "As for me, I continue to stay far far away from any bank stocks, preferred or otherwise. [They m]ay have nice dividends but the sector still stinks to me."
Rathgar believes that defensive stocks are the ones to avoid right now. "Dividend stocks/funds seem to be fairly or undervalued; however, the defensive area such as consumer stables and utilities seems to be overvalued."
Bobk47 agreed that utilities aren't particularly attractive at current levels. "[Utilities] strike me as overvalued unless you believe present interest rates will remain unchanged for many, many years. Conversely, many health-care stocks are very close to my buy prices."
Rforno cautions that investors who shop based on yield alone--without doing their homework and without being selective--are likely to get burned. "I think the 'bubble' in dividends is in ETFs that cater to dividend seekers--i.e., the one-stop-shop for folks yield hunting who don't want (or can't) do their own due diligence on individual names. As I recall their inflows have exploded in recent months. I think the uninitiated continue to screen for 'max yield' without thinking things through first, which can be dangerous. They hear 'dividends are safe' and take that simple statement as assurance that whatever they buy that pays a big divvie won't ever go down."
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It's easy to see the appeal. Still reeling from accounting frauds and the bursting of two bubbles in the space of a decade, many investors view a company's ability to pay a dividend as an important demonstration of financial strength and stability. And although the risk profiles of stocks and bonds are completely different, some yield-starved investors have viewed dividend-payers as an attractive alternative to bonds, given the latter's low payouts and potential vulnerability in the face of rising interest rates.
But is there a risk that dividend-paying stocks could become too popular, forcing up valuations and pushing down yields? I recently posed that question in the Income & Dividend Investing forum of Morningstar.com. Responses showcased a range of opinions on the topic: While nearly all posters agreed that the stocks are not in bubble territory, even some dividend fans conceded that yield-rich stocks aren't nearly as attractive as they were a year ago. Many other posters took pains to note that dividend-payers are far from a monolith; successful investors need to pick their spots.
To read the complete thread or share your own opinions, click here.
'Dividends Are Timeless' In response to my query about whether dividends are in a bubble, poster NoPanic was emphatic. "I think not! Many dividend paying stocks are still very undervalued in my opinion. Take General Electric as an example. This great company still has plenty of forward price and dividend opportunity as do some natural gas partnerships such as Energy Transfer Equity displayPTip('ETE', 'ETE','YTD', '', '', '', '', '', '','msg','P');."
Bnorthrop also scoffed at the notion that dividend-payers are nearing bubble territory. "Bubble? Hah! We're nowhere near nosebleed territory (e.g., Vanguard Dividend Appreciation displayPTip('VIG', 'VIG','YTD', '', '', '', '', '', '','msg','P'); has a P/E of 12.03--plenty of oxygen). The only existential danger is whether popularity becomes a fad. But fads don't last, and popularity comes and goes. What remains is the Steady Eddie dividend payers who, despite their unassuming personality, quietly rule the world."
Nor is FidlStix worried--yet. "I'd say dividend payers are marching toward the mean (fairly valued) instead of breezing toward a bubble (overvalued)."
Wienkeg agreed. "Bubble, to me, means wondering why someone is paying that much for something. Stock [trading at] 100 times earnings = Internet bubble. House built for $100K sold for $300K = housing bubble. Locking up money for 10 years at 1.8% when inflation is 3% = Treasury bubble. Dividend payers are not in bubble territory yet. I'll let you know when I see it."
Chief K acknowledged that just because dividend-payers aren't screamingly cheap right now, they can still be attractive. "Any time an investment becomes popular it's going to be very hard to continue to call it undervalued. However, buying something for fair value isn't the end of the world--in fact buying things at a fair price describes almost every financial transaction of my life. Bargains are rare and precious and I love finding them, but they are rare."
Using dividends as a rough proxy for valuation, HERBSCORE thinks dividend-payers may still have some gas left in the tank. "When I look around at some of the MLPs, health/medical and real estate REITs, telecom, utility, intermediate term bonds, and energy stocks I still see attractive yields. Even big-cap equities are yielding 2% to upwards of 4% and offer good total returns. How attractive these stocks are depends on your risk appetite, of course."
Poster sws1967 agrees with HERBSCORE: If dividend payers' valuations were a concern, yields would be lower than they are right now. (A stock's dividend yield consists of its dividend per share divided by the current share price, so when share prices are up, yields are down.) "You can look at these individual companies and compare their P/E ratios, look at their yields, and at today's prices I don't see that they've shot so far up in price that the yields have dropped. When/IF that happens--the price increasing enough to reduce the yield significantly--you can look for a bubble, but I don't see a bubble now. I just see people being rational and putting their money to work in a consistent, rewarding vehicle...probably where it should have been for the last 10 years anyway!"
Other posters stated flatly that they're not particularly concerned with the valuations of their dividend-paying stocks. As long as their holdings remain on solid financial footing and continue to show them the money, they're content.
BuyerBeWare wrote, "The nice thing about dividend paying companies is that they strive to pay dividends, and strive to increase dividends. The share price is not something anyone should focus on... Share prices will always go up and down, but the dividends should keep on coming and keep on rising. Sell when the company starts lowering or suspending dividends and when the entity becomes unstable."
EnvEng proclaimed: "I don't care all that much about share price if the dividend is good and safe."
ElLobo concurred, arguing that a dividend cut should be a bigger concern for investors than the stocks' valuations. Through that lens, "dividend-paying stocks had their bubble burst back in 2007-2009, whenever companies cut, or eliminated, their dividends"¦ I don't see the same risk, today, in future cuts in dividend payouts."
Poster povdds agreed that steady dividend payouts are important, but noted that investors need to be holistic in their evaluations. "[D]ividends are one part of the pie chart but not the only part. Dividends do potentially represent a tangible benefit and the sign of a well-run company, but payouts, future and current earnings (good luck on that one), and future stumbles have more to do with your relative risk and gain than absolute dividend payout."
'You Can't Fake a Dividend' While few posters were willing to stick their necks out and call dividend-payers cheap, several argued that the fundamental case for income-producing stocks is very much intact; therefore, they're not particularly worried about valuation at this time.
Cliff opined, "I don't know that it's so much a matter of being enthused about dividends as it is recognizing their historical importance to long-term returns. Especially those cash payouts from enterprises that have both a track record for growing those payouts and prospects for future growth."
JusticeMann1 concurred, "It seems that unless you can pick the next Baidu displayPTip('BIDU', 'BIDU','YTD', '', '', '', '', '', '','msg','P'); [a Chinese Internet firm whose share price has soared], the rest of the equities market seems like a rigged game for the small investor. Therefore, solid dividend payers and MLPs with reinvested dividends seem the only strategy that really works for a long-term investor who doesn't have access to a hedge fund."
Rathgar believes that dividends are one of the best gauges of a company's financial strength, noting, "I like the saying, 'You can't fake a dividend.' It means the company has excess cash after paying all expenses. Stronger profitable companies tend to pay dividends so in this sense dividends are timeless."
Another oft-mentioned theme was that demographic trends--specifically, the swell of Baby Boomers retiring in the years ahead--should stoke strong demand for dividend-paying stocks, particularly given that bond returns are expected to be muted. Nancyh summed up the bull case as follows: "Macro forces working for dividend-payers include pressure on companies to increase payouts; retirees flooding the market for years to come; and growing awareness that bonds may be overvalued and often are also subject to market forces."
Bizman amplified Nancy's point that dividends could become more plentiful in the future. "Why shouldn't a lot more companies share the wealth with their owners? The average dividend yield and payout is low compared to history before the last 20 years or so. We could be in the early innings in terms of companies that can easily afford it (big cash flows and huge hoards of cash on their balance sheets) deciding the thing to do is to pay a dividend at a 40-50% payout ratio."
Return to DiscussNext21PrevBe Seen. Be Heard. Become a Morningstar Contributor.Reach a readership of advisors, professionals, and active investors. Submit your commentaries for publication on Morningstar.com.
Securities mentioned in this article Ticker Price($) Change(%) Morningstar Rating Morningstar Analyst Report With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies. Video Reports On the Radar for 2012 More Videos... Most Popular Related News Also in Investing Specialists Avoiding Bond Market Woes Doesn't Come Without Trade-offsIndexing and the Average Active ManagerConsumers Make More, Save More, Potentially Fueling Growth Sponsored Links Buy a Link Now Sponsor Center Please Wait... PERSONALFINANCE USA_FSTMX,USA_MMM,USA_INTC,USA_PEP,USA_GE,USA_PG,USA_MSFT,USA_ETE,USA_NVS,USA_BIDU,USA_VIG FO_USA_FSTMX E0_USA_MMM E0_USA_INTC E0_USA_PEP E0_USA_GE E0_USA_PG E0_USA_MSFT E0_USA_ETE E0_USA_NVS E0_USA_BIDU FE_USA_VIG &primaryKeyword=PERSONALFINANCE 2 {CommentWebService} .bloomreach-wrap a { color: #000000; text-decoration: none; } .bloomreach-wrap a:hover{ text-decoration: underline; } .bloomreach-wrap { text-align:left; padding-left:5px; margin:15px 0px 0px 4px; padding-top:15px; width: 370px; } .br-related-heading, .br-related-query, .br-found-heading, .br-sf-widget { border-bottom: 1px solid #CCCCCC; font-size: 11px; line-height: 15px; padding: 5px 0 5px; } .br-related-heading, .br-found-heading { border-top: 2px solid #999999; font-weight: bold; padding: 2px 0 7px; color:#333333; } .br-found-heading { margin-top:30px; } .br-sf-widget-merchant-desc { color: #999999; padding-top:6px; } var br_related_rid = "Rbjsn2yz9dr9fxpowhe4t-uf,r0,m0"; $(".br-sf-widget-merchant-qv").remove(); $(".br-sf-widget-merchant-img").remove(); $(".br-sf-widget").next("div[id^='br']").remove(); if($(".bloomreach-wrap #BloomreachWidgetProxy").length>0){ $(".bloomreach-wrap #BloomreachWidgetProxy").css("display","block"); } else{ if($("#BloomreachWidget").length>0){ document.getElementById("BloomreachWidget").innerHTML=$("#BloomreachWidgetProxy").html(); $("#BloomreachWidgetProxy").remove(); } } .br-related-heading, .br-found-heading { border-top: 3px solid #666666; font-weight: bold; font-size:10px; padding: 2px 0 7px; color:#000000; } OAS_AD('Bottom'); Content Partners Site Directory Site Map Our Products Read Full Article »