There is no dividend bubble.
Or, at least, that's what I concluded last week when I dug into the numbers for dividend stocks to see if they've truly been bid up beyond reason by yield-hungry investors.
In short, I found that on average dividend stocks in the S&P 500 currently have a higher yield, a lower valuation, and a lower payout ratio than they've had over the past 10 years. Of course, for investors wanting to invest in individual dividend stocks, "on average" may mean that the picking is a bit easier, but it doesn't guarantee that you'll grab a dividend stock on the right side of that average.
In fact, as I pointed out in my previous article, some traditional dividend powerhouses like Consolidated Edison don't look particularly attractive when compared to their historical numbers. So today, I thought I'd share a closer look at some of the individual stocks whose numbers make them look like good buys, and a few like Con Ed that may need to cool off a bit.
Five to buy
|
Company |
Dividend Yield |
Enterprise Value / Operating Income |
Payout Ratio |
|---|---|---|---|
| Exelon (NYSE: EXC) | 5.4% | 8.5 | 55.8% |
| Eli Lilly (NYSE: LLY) | 5.0% | 7.2 | 50.1% |
| General Electric (NYSE: GE) | 3.5% | 33.0 | 45.6% |
| Intel (Nasdaq: INTC) | 3.1% | 7.3 | 31.9% |
| Eaton | 2.9% | 12.4 | 34.2% |
Source: S&P Capital IQ.
Now let's be clear as to why these stocks made the list. In each case, the dividend yield was higher, the valuation multiple was lower, and the payout ratio was lower than the average over the past 10 years. So, for example, though Eaton's 2.9% dividend yield may seem low for the group, its average dividend yield over the past decade was just 2.4%. And while GE's valuation multiple may seem high, the average over the past 10 years was a slightly higher 33.6 (note that enterprise value includes debt, and GE's financial arm carries a good deal of debt).
There are no guarantees when it comes to investing, and this group is no exception. The market may be purposely allowing valuations to fall and yields to rise precisely because investors know that the future may not be as bright for some of these companies as the past has been. Lilly, for instance, is among the major pharma companies that faces a wave of patent expirations. Intel, meanwhile, is trying to deal with the fact that its chips aren't the de facto standard in the fast-growing mobile world.
That said, I like risk/reward trade-off for these stocks enough that I've rated them all outperformers in my Motley Fool CAPS portfolio (there's nothing like accountability!). I've also purchased Intel and Lilly in my personal portfolio.
And then there're these guys...
|
Company |
Dividend Yield |
Enterprise Value / Operating Income |
Payout Ratio |
|---|---|---|---|
| Southern Company (NYSE: SO) | 4.3% | 14.0 | 72.7% |
| ONEOK | 3.0% | 12.3 | 63.0% |
| Plum Creek Timber | 4.3% | 26.8 | 140.9% |
| Kimco Realty | 4.1% | 28.5 | 267.4% |
| Ventas | 4.4% | 41.0 | 143.0% |
Source: S&P Capital IQ.
As with the companies above, the spots on this list were earned by the numbers. In this case though, I've included stocks with a lower dividend yield, higher valuation, and higher payout ratio than they've had in the past. So while Plum Creek, Kimco, and Ventas all typically have very high payout ratios, in each case the current ratio is unusually high. And though ONEOK's multiple may look low compared to the rest of the group, historically investors have been able to buy it at an even lower valuation.
To be sure, being on this list doesn't mean that these are terrible companies by any stretch. Included on the list are a few Motley Fool newsletter picks -- Southern, ONEOK, and Plum Creek -- and if I happened to own one of these I may not be rushing to sell. However, despite the fact that there is no broad dividend bubble, these stocks all look a bit bloated and don't appear to be great buying opportunities today.
The bottom line
The conclusion boils down pretty simply. First, investors are right to be excited about dividends: Not only have they been shown as a key contributor to investing success, but dividend stocks broadly look prime for the picking right now. However, investors buying individual dividend stocks still need to be sure to do their homework, because while many dividend stocks look like good buys, not all of them do.
If the five buy ideas above weren't enough for you, my fellow Fools have gathered together 11 more dividend ideas in a special report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can get a free copy of that report by clicking here.
