Dividends4Life: Are Dividend Stocks Too Expensive?

Are Dividend Stocks Too Expensive?

Posted by D4L | Friday, July 11, 2014 | | 0 comments »

This article takes up that challenge and shows how to construct a high-dividend portfolio that is “cheap” on a value basis. Larry Swedroe, director of research for the BAM Alliance, a community of more than 130 independent registered investment advisors, and Mebane Faber, portfolio manager at Cambria Investment Management, have expressed concern that U.S. dividend-paying stocks have become expensive in recent years relative to a broader universe of value stocks. Dividend-focused investing is becoming more popular, with the attendant risk that the historical valuation advantages (e.g., that you are buying stocks with low prices relative to fundamentals) will be diluted or entirely erased. The asset flows into dividend-equity strategies – especially domestic stocks – raise the possibility that dividend investing is a crowded trade.

Looking beyond the U.S., the story becomes more nuanced. The yields on a range of sectors in a number of regions exceed those of their U.S. counterparts, but these higher yields come with higher risk. Investors will not be well served by simply chasing yield across borders. In a recent article, Faber (see Figure 7 in the article) looked at the relative valuation of dividend payers. He found that a portfolio of the 20% top dividend-yielding U.S. large-cap stocks since 1963 consistently traded at lower P/E than the S&P 500. This high-dividend portfolio never traded at higher P/E than the S&P 500 until 2008 but has been consistently trading above it since 2011. This simple but compelling analysis demonstrates that portfolios formed exclusively on the basis of dividend yield have become relatively highly priced, at least since 2008, compared to their historical P/E ratios.

Source: ValueWalk

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