Dividend Stocks Overvalued Because of Rush to Yield?VW Staff
In the past few years, dividend stocks have exploded in popularity because, in some cases, you could actually get a higher yielding dividend than the yield on a US Treasury bond. Unfortunately, some analysts are saying that dividend stocks are now overheating and have gone too far. Dividends are most popular when there is a good deal of volatility and uncertainty in the markets. In theory, dividend stocks fall less than the rest of the pack when uncertainty is high.
Sam Burns of Brown Brothers Harriman thinks that the dividend trade is overcrowded after years of popularity. In two different charts, Burns points out that in the high dividend stocks vs low dividend stocks that higher yielding stocks are actually now more expensive on historical levels than low yielding stocks.
These charts just prove that dividends could be overcrowded. However, I believe dividends are a vital part of your portfolio or they should be. Despite the fact that they are overcrowded, dividends should still be a way to fight uncertainty and threatening conditions.
Look, there are still a good amount of stocks that have higher yields than US Treasuries. Until the day that Treasuries retake the higher yield I am sticking with dividends. These days, you are now able to buy multiple dividend stocks with one ETF, SPDR S&P Dividend ETF (NYSE:SDY). SDY has quite a few different stocks that they hold because they believe that those dividends are the safest.
There is one scenario in which I do not like dividends and that is the fact that tax breaks by the federal government are coming to an end. One of those tax breaks is dividends being taxed as income which will become a reality by the end of this year unless Congress extends the tax cuts. Most people do expect the government to further extend dividends to be taxed at 15% rather than a much higher percentage.
If the government does not extend this break, I think we are going to see a lot of people head for the exits on dividends because you will be losing so much of the dividend that it might be better to look for other opportunities out there.
Until then, I will continue to invest in dividends because it provides safety and income. In uncertain times safety and income are two of the best things you can have.
As always this this not formal investment advice, just my two cents.