When it comes to dividend stocks, caveat emptor, writes Jason Zweig of The Wall Street Journal.
Dividend stocks are on a roll as of late, with the 100 highest-yielding stocks in the Standard & Poor's 500 Index beating the overall index by an average of eight percentage points last year, according to Birinyi Associates.
As a result, dividend-oriented U.S. mutual funds and exchange-traded funds have seen a net inflow of $9 billion so far this year, while all other U.S. stock funds have suffered a combined net outflow of $7.3 billion, according to EPFR Global.
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But while investors are buying dividend stocks in place of Treasurys and their paltry yields, investors should realize dividend stocks are nowhere near as safe as Treasurys.
The Dow Jones U.S. Select Dividend index plunged 53.8 percent from the stock market's record high in October 2007 to its nadir in March 2009, as bank stocks dominated the dividend category.
Now technology stocks account for much of the dividend universe. So a plunge in that sector could be quite painful for dividend investors.
Investors should remember that the right reason to own dividend stocks is that companies with rising dividends generally outperform other stocks over the long-term, Daniel Peris, co-manager of the Federated Strategic Value Dividend fund, tells The Journal.
Indeed dividend stock devotee Jeremy Siegel found that re-invested dividends produced 97 percent of the stock market’s total return from 1926 through 2008.
Editor's Note: How to Pay Zero Taxes . . . Legally
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