Are Dividend Stocks the Next Bubble?

Dividend stocks are leading the market and some pundits believe the rally is a bubble about to end badly. But they may be underestimating the flood of income-starved retiree money heading this direction in a record low-yield environment.

  • Share
  • Read Later
China Photos / Getty Images

Dividend-paying stocks have been on a tear, and if you believe the experts it has all gone much too far. We are now in yet another bubble, this one comprising just about any stock with a yield. Look out below.

Certainly, there is reason to take notice. In the last three months, traditional dividend-paying industries including telecom (13.7%) and utilities (7.5%) have far outperformed the broad S&P 500 (-1.2%) and individual sectors like materials (-3.4%) and financials (-5.4%).  The Wall Street Journal reports that dividend-payers are now valued in the market at 25% more than non-dividend payers.

(MORE: Subprime Private Student Loans: No Way Out)

And the money keeps rolling in. From The Journal:

“Investors have plowed a net $16 billion into U.S. dividend equity funds since the beginning of the year, with inflows picking up in recent weeks. By contrast, some $25 billion has been withdrawn from non-dividend funds, says data tracker EPFR Global.”

So something is afoot. But every rally is not a bubble. What’s happening to dividend stocks seems analogous to the housing market in, say 2002. That’s when the bubble talk began and, of course, a bubble was building. But it took another five years and prices rose another 50% before the bubble burst. Even with the brutal decline since 2007, most who bought real estate in 2002 are about even.

Bubbleologists may be misreading the dividend frenzy. Wall Street generally attributes the latest rush to dividends as a result of the persistent Euro crisis and recent hiccups in the China growth story. Fearing a global slowdown, the thinking goes, investors are shifting out of economy-sensitive stocks into sectors like healthcare and consumer staples—considered defensive because of their steady cash-flow even in hard times and their commitment to paying a dividend.

(MORE: U.S. Authorities Ramp Up War on Offshore Tax Havens)

Yet this defensive shift is but a small part of the story. What’s really driving the trend to dividends is the low yield environment that has retirees, especially, so desperate to secure an income stream that they have begun moving up the risk ladder. The 10-year Treasury bond just hit a record low yield of 1.4%. The average savings account now pays .19% and the average money market rate is just .22%. Those who invest for income have been living a nightmare, and many simply can’t tolerate it anymore.

To Wall Street, these unsophisticated yield chasers make it feel like a bubble. In this view, the dumb money is last to move in—and at just the wrong moment. From the Seeking Alpha website:

“There is a risk that inexperienced investors, turning to dividend growth stocks in their search for yield, may be walking into an over-valuation trap.”

That is, of course, a possibility. But it seems more likely that Wall Street is underestimating the degree to which individuals—retirees, most notably—will continue to flood into dividend stocks as long as rates remain so oppressively low. Income seekers don’t have a lot of great options. So it may be a bubble. It may become a bubble. But like home prices in 2002, this bubble won’t burst for a while. A sharp uptick in interest rates would do it—but that’s not going to happen as long as the global economy limps along.

MORE: Dividend Stocks Are Hot, But They Aren’t Bonds

12 comments
best cover letters
best cover letters

I wanted to thank you for this great read!! I definitely enjoying every little bit of it I have you bookmarked to check out new stuff you post.

Mark S
Mark S

Does time have anyone on the payroll at Time with a even a modicum of understanding about the equities market?  Based on your article, I believe the answer is no.

Dgg33
Dgg33

my classmate's aunt earned $21265 past month. she is

working on the internet and bought a $360600 condo. All she did was get lucky

and try the advice revealed on this site http://tiny.cc/scuxhw

Firozali A.Mulla
Firozali A.Mulla

The big question. Crude Oil Barely

Keeps Its Head Above Water

Markets Find Trap Door, but Are the Markets Technically Broken? If you are a

statistician, then you may be able to read this. A weekly look at the Nasdaq

Composite with

the relative strong when the relative strength indicator moves lower the NASDAQ

typically moves lower. This means the Samp;P 500 is outperforming the Nasdaq

Composite. When the relative strength line moves higher the NASDAQ moves

higher. This points out the relative strength indicator; this is known as a negative

divergence. Even though the NASDAQ moved higher from late December 2011, the

Samp;P 500 actually outperformed the NASDAQ. The relative strength indicator

move lower while the NASDAQ move higher. This created the bearish negative

divergence. This negative divergence ultimately signalled a bigger drop for the

equity markets what was later blamed on Europe. The main theme to take away is

when the NASDAQ’s relative strength line rolls over and moves lower, the

markets become a more challenging environment to make money  That is because investors are seeking bigger,

larger cap names and shunning the riskier, higher beta plays in the NASDAQ.

Better said, when the relative strength is moving lower the markets are in risk

off mode. When the relative strength is moving higher the market is in risk on

mode. Currently the indicator is moving lower signalling a risk-off trading

environment. Friday and today confirm this indicator. Now having said that the

Friday is what we need. Put simply the daily charts drafted by the expert’s

rolls like the clouds movements, up and own pouring rain or the sun scotches

you. In short no one knows where we are going but we have o carry on saving if

we want to survive. There is no guarantee from any. We could be in for a

challenging third quarter earnings season if current revenue numbers are to

tell here. I fully agree

with the charts , but the red, green, blue , yellow only are for us who

understand the statistics, Who will use these I wonder. In the climate of total

uncertainties I have no idea who will help? All are out to make a quick

buck.  What we are waiting for is Mondays

and Fridays and again the same .You are asking us

when we are unemployed? I love the pun. I remembered all want to

kick the leaning fence. To us all the Z charts, Gants , Pie ,

bar , and all the road maps change daily and to be very honest I am also

running short of ink. Need to go to the chemist and get

the erasable ink To me you need to tell

stories of past and say it loud, SEE WHAT WE HAD AND WHERE HAVE YOU BROUGHT US?

May be someone kind man will throw in in a penny thinking you are a gone case.

escaped from the mental asylum. I thank you Firozali A.Mulla DBA 

 

Amandajhon
Amandajhon

So where is all the business expansion? Hey, Mitt etal claim by investing in companies, businesses expand and hire people, so I ask again with all these investments, where is all the expansion and all the hiring? stop waisting your time . it s time for a life change qr.net/easyMOneYt0maake

Tommy3134
Tommy3134

So where is all the business expansion? Hey, Mitt etal claim by investing in companies, businesses expand and hire people, so I ask again with all these investments, where is all the expansion and all the hiring?

MaryWaterton
MaryWaterton

 China.

Ashley
Ashley

... i really agree with you guys about this article .

..  this one about making money from home is amazing as well , hope we see more mthodes , it really helped me . 

=>  po.st/dp8U0H 

Ashley
Ashley

yeah agree , and good article

..  this one about making money from home is amazing as well , hope we see more mthodes , it really helped me . 

=> po.st/NbRO75