Millions of investors have turned to dividend stocks to get their attractive combination of current income and future growth. But with their immense popularity, many dividend stocks have seen their prices rise dramatically, raising concerns that they might be overpriced.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, takes a closer look at the question of whether dividend stocks are overpriced. Dan begins by noting that two popular dividend ETFs, Vanguard Dividend Appreciation (NYSEMKT:VIG) and Vanguard High Dividend Yield (NYSEMKT:VYM), have overall earnings multiples that are actually less than those of the S&P 500. Yet Dan goes on to find that in certainly high popular sectors, dividend stocks look more expensive. For instance, among consumer stocks, Dan finds that Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), and Coca-Cola (NYSE:KO) have earnings multiples above 20, even though all three companies have challenges facing them that could limit their growth in the future. Dan concludes that while dividend stocks aren't universally overpriced, you have to be careful to make sure individual stocks you choose have reasonable valuations.