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Dividend-paying shares have been a hot sell for quite a while. So hot, in fact, that at least one analyst is wondering whether the “dividend trade” has gone too far, too fast.
Investors often barrel into dividend-paying stocks when times are rough and volatility is high. The second half of 2011 was a great example. Europe’s debt crisis and global economic worries rocked financial markets. Yet many have touted dividend-paying shares, especially since these stocks tend to fall less than others when times are tough.
But considering heavy investor interest in dividend-paying stocks over the last few years, Sam Burns at Brown Brothers Harriman wonders if this trade has become too crowded.
He presents two charts that showcase valuations of the highest yielding stocks compared to the lowest yielding ones in the S&P 500. The big takeaway is high yielding stocks are looking frothy at current levels.
“These metrics suggest that the heavy investor interest in high-yielding stocks has stretched their relative valuations compared to historical norms,” Burns says. “This does not necessarily imply high-yield stocks will underperform soon, as valuations can remain extended for long periods, but may raise the risk of using dividend yield alone as a stock selection strategy.”
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