Are we seeing a dividend bubble?

By Prieur du Plessis, on December 26th, 2011 posted in: Investment, Stocks

Given the plethora of market uncertainties, investors have over the past few months started placing an increasing emphasis on dividend yield. In particular, multi-national companies operating in regions or sectors that would enable them to grow dividends over the next few years have gained favor. These so-called dividend Aristocrats have recorded strong relative performance compared with the benchmark indices, as illustrated by the relative price chart below of the S&P 500 High Yield Dividend Aristocrats Index versus the S&P 500 Index.

Source: StockCharts.com

This trend raises the raising the question: Are we seeing a dividend bubble?

I concur with the answer provided from across the pond by David Fuller, co-author of FullerMoney, as follows: “The short answer is not yet, but all good trends eventually develop some bubbly characteristics, of a greater or lesser degree. A number of high-yielding, multinational ‘Autonomies’ have shown impressive relative strength this year. Two warning signs to watch out for are: 1) trend acceleration relative to their 200-day moving averages; and 2) price-earnings ratios that are clearly higher than most other sectors or the market generally.

“Another test for these shares, for which I maintain current relative strength is understandable, will occur when a stronger overall market environment revives ‘animal spirits’ sufficiently for investors to chance their luck in small-caps and other laggards.”

Also read The Wall Street Journal’s recent article, “Dividend Stocks Become the Heroes – Shares Often Derided as for ‘Widows and Orphans’ Are Outdoing Their Lower-Yielding Cousins”.

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