Ignore the Dividend Stocks Bubble Babble
Companies / Dividends Nov 29, 2013 - 06:36 AM GMTBy: Investment_U
Marc Lichtenfeld writes: As every investor knows, dividend stocks have been hot for years. Since the market bottomed in March 2009, the Dow Jones Select Dividend Index is up 226%, versus 171% for the S&P 500.
And lately, the idea of a market bubble has been gaining momentum. Alex demolished the notion of a broad-market bubble on Friday.
I agree completely. Yet questions persist about the prospect of a dividend stock bubble. Perhaps because dividends have outperformed the broader market, some worry that they’re even frothier. Last week, CNBC ran a report about the topic. And we’ve started getting questions in our Investment U Mailbag from concerned members.
This note, which arrived in our inbox last week, is a perfect example:
“I read an article in a major paper yesterday that said dividend stocks used to be considered more on the safe side of investing. But now they are risky because of many factors… Also, it has been said that dividend stocks – like other kinds, such as growth or value stocks – go through cycles. There will be times when dividend stocks will be out of favor and not do well.”
Really? Let’s consider this more closely.
There’s no doubt that dividend stocks, as a group, have had a great ride lately. And it’s not surprising, considering the other options for income investors in this environment. You get just about the same amount of interest from the bank as you do putting your money under your mattress. And Treasury bond yields are so low, it’s ridiculous to even think about locking up your money for 10 years for 2.7% per year.
But the idea of a dividend bubble is silly.
A Little Perspective, Please
Think back to the Internet bubble in 1999 or the real estate bubble of 2006. I don’t see doctors and lawyers quitting their jobs to invest in dividend stocks. I don’t hear people at cocktail parties saying dividend stocks are “the only way to make money.”
And I don’t see dividend-paying companies hiring bands like Kiss to play their parties.
Those things were going on during the Internet and real estate bubbles. I saw it firsthand. I sat 20 feet from the stage as James Brown played a private party for a dot-com company that didn’t even have a product yet. I spoke with doctors who cut back their hours so they could day-trade and flip houses.
We’re not seeing anything close to that kind of mania in dividend stocks.
Dividend Outperformance
Dividend payers have long outperformed the broader market. You can see in the chart below that long-term investors have done significantly better in dividend stocks than in the S&P 500. And dividend growers and initiators (stocks that begin paying dividends) performed even better.
Over the past 40 years, $100 returned $1,622, a 7.2% compound annual growth rate, when invested in the S&P 500; $3,104 or a 9% annual growth rate, in dividend payers; and $4,169, a 9.8% average annual return, in dividend growers and initiators.
Now, you know the old caveat: Past performance is no guarantee of future results. But which do you think has a better chance of outperforming – XYZ stock, or a stock that pays a 4% dividend yield and grows the dividend by 10% every year?
Dividend stocks may be popular. They may even be hot. But to suggest that they are so frothy that they are going to crash is not logical.
That doesn’t mean they can’t go down in a bear market. They certainly can. But when stocks are falling, what’s going to be more popular, Twitter (NYSE: TWTR) or a stock like Lockheed Martin (NYSE: LMT) that pays a 3.9% yield and raises the dividend by a double-digit percentage every year?
Dividend stocks are not in a bubble, no matter what some mainstream media types may try to suggest in order to scare you into watching or reading their reports.
I’ll start worrying we’re in a dividend stock bubble when I hear people at dinner parties quoting from my book Get Rich with Dividends and saying dividend stocks are the only way to make money (even I don’t say that). Until then, if you want your long-term portfolio to outperform the market, stick with dividend growth stocks and ignore the bubble babble.
And don’t forget to leave a comment using the link below or via the Investment U Mailbag with your thoughts and observations on the notion of a dividend bubble.
Good investing,
Marc
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