The Allure of Dividend Growth Stocks

Wednesday, 19 Sep 2012 08:27 AM

By Dan Weil

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Investors have stampeded into dividend stocks across the board over the past 3 ½ years, seeking a decent income stream in a time of historically low interest rates.

But now investors are getting pickier when it comes to dividend stocks. They’re focusing on companies that appear set to increase their payouts quickly, The Wall Street Journal reports.

"In the dividend area, we're seeing valuations that are looking pretty full to us," Paul Stocking, co-manager of Columbia Management's Dividend Opportunity fund, tells the paper.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

"We have been looking for more dividend growth, relative to stable, high-dividend payouts, partly because of this move that we have seen in the marketplace chasing these high-dividend payers."

The Fed’s announcement earlier this month that it will embark on another round of quantitative easing will only intensify this quest for dividends. That’s because the Fed seeks to push long-term interest rates even lower.

"All I'm looking for is high-quality companies that have some dividend yield and also the ability to grow that dividend at more than the rate of inflation," Mark Freeman, chief investment officer at Westwood Holdings Group in Dallas, tells The Journal.

He recently bought PepsiCo (PEP) stock, encouraged by the 4.4 percent increase in the company’s dividend this year and 7.3 percent last year.

Morningstar research firm has put together a list of the top-yielding dividend stocks held by at least five of its 22 “ultimate stock pickers,” who are Morningstar’s favorite mutual fund managers.

Vodafone (VOD) heads the list with a yield of 5.12 percent, followed by GlaxoSmithKline (GSK) with a yield of 4.85 percent, ConocoPhillips (COP) with a yield of 4.57 percent, Eli Lilly (LLY) with a yield of 4.18 percent and Novartis (NVS) with a yield of 4.13 percent.

While some experts argue that the flood of investors into dividend stocks has made them overvalued, Morningstar dividend stock analyst Josh Peters says this argument has some merit, but only to a point.

“I agree that high-yielding stocks — those paying 3.00 percent and up — are more or less fairly valued,” he says on Morningstar.com. “There are some areas of overvaluation — regulated utilities, [real estate investment trusts], telecoms and the tobacco stocks come to mind. … But there are also pockets of opportunity.”

Stocks with yields in the low 3 percent region are trading at lower valuations than are those with payouts of more than 4 percent. “And you usually get much better dividend growth and prospective total returns to boot,” Peters says.

His favorites include utility Public Service Enterprise Group (PEG), with a yield of 4.48 percent; People's United Financial (PBCT) bank, with a yield of 5.26 percent; General Mills (GIS), at 3.17 percent; and Chevron (CVX), at 2.92 percent.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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