Tags: Dividend | Stocks | trade

Dividend Stocks a ‘Crowded’ Trade? Not by a Long Shot...

Wednesday, 02 May 2012 11:29 AM

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You have to hand it to Ben Bernanke. The Federal Reserve Bank Chairman long promised that he would “throw cash from a helicopter” if necessary to shore up the economy, and he absolutely stuck to his word.

Interest rates are stuck at rock bottom, and there appears to be a consensus at the Fed to continue that policy for years to come.

Why keep money cheap? It buys time. Through so-called “financial repression,” the government gets to borrow at a rate lower than current inflation. Savers suffer as CDs, bank accounts, and money markets pay zilch, but trillions in government debt gets slowly erased.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

It’s not a real answer (we’re talking trillions here), but such a policy does give Washington breathing room. And it is clearly less disastrous than raising taxes in a recession.

The secondary effect, however, is to push yield-starved savers into “risk” assets such as stocks, and particularly into dividend stocks.

Which raises a reasonable question: If the Fed is the invisible hand in the market, is the dividend-stock trade getting crowded? Even headed into bubble territory?

Not by a long shot, according to new analysis by fund manager Invesco, published by Morningstar.

“It’s important to remember that history has shown that dividend-paying stocks are part of an enduring, fundamental approach to value investing and not a thematic allocation,” write Meggan Walsh and Clint Harris of Invesco.

Stay focused, they counsel, on “total return” and not simply a high yield, and you can win with dividend payers in just about any market environment.

Dividends, they note, account for nearly half (45 percent) of the S&P 500 return since 1925, outperforming stocks lacking dividends by 7.2 percent on an annualized basis over four decades, and by 12 percent on average in bear markets.

Plus, dividend growth, the increase in dividend payouts by selected companies, has outpaced inflation by more than 1.1 percent, an important safeguard.

What can go wrong? Chasing yield, they write. Novice investors tend to focus on short-term yield, a tactic which draws them toward utility stocks. Fine and dandy if income is your only concern. But protecting principal should matter, even to mature investors.

The better choice over time, they argue, has been consumer staples stocks. While these pay lower dividends now, they tend to grow those dividend payments over time, and they are more consistent with their dividends, rarely cutting them in downturns.

That creates a long-term, double-digit total return — even if the yield is low today by comparison.

“The highest-yielding stocks have lagged the overall dividend-paying stock universe over the past 40 years and dividend growers by an even wider margin,” they conclude.

“Importantly, the valuation for dividend growers is quite attractive as they are historically undervalued versus both the overall market (14 percent discount to historical average) and the highest yielders.”

In short, it’s a stock picker’s market, even when you’re talking about dividend stocks.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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