Not All Dividend Stocks Are Overvalued 25 comments
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While the market has enjoyed impressive gains ever since it hit a multi year low in March 2009, investors are beginning to get nervous about valuation. If valuation is too high, chances are that investors are overpaying for stocks purchased, which could lead to lower performance over time.
Luckily however, the rally off of March lows has been led by speculative names from the financial sector. Most of the high quality names that dividend investors follow, such as Johnson & Johnson (JNJ) or Pepsi Cola (PEP), have mainly followed the market higher in its ascent. If we were truly in a new bull market however, then we should expect that most investors would switch to quality blue chip companies. Another positive part is that stock prices are still lower, in comparison to their levels in September 2008.
While entry price does matter, defensive dividend investors should also look at the dividend coverage and the company’s ability to grow the distributions over time. Only after these two prerequisites are met, should investors begin evaluating companies with at least a decade long histories of dividend increases on the basis of valuation.
A minimum requirement for yield should also provide an adequate margin of safety in dividend income to investors in the event that the timing of the purchase was not correct in the short term. Even if the stock price stays below the entry price of dividend investors for a prolonged period of time, they would still be in a position to get paid to hold the stock. Enterprising dividend investors might even be able to re-invest distributions at lower prices.
In addition to that, if the company manages to keep raising distributions even during economic downturns, then it should also be able to increase dividends during economic rebounds. Thus, one could reasonably expect that share prices would increase during a bull market.
I have listed several dividend stocks, which are not overstretched. They are mostly dividend achievers and aristocrats. These are some of the positions I have added to most recently.
Abbott Laboratories (ABT) manufactures and sells health care products worldwide. The company has raised dividends for 37 years in a row. Abbott currently trades at 13.30 times earnings and yields 3.50%, with an adequately covered dividend. (analysis)
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. The company has raised dividends for 34 years in a row. Automatic Data Processing, Inc. currently trades at 14.70 times earnings and yields 3.40%, with a sufficiently covered dividend. (analysis)
The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company has raised dividends for 32 consecutive years. Clorox spots a P/E ratio of 15.50 and yields 3.40%. (analysis)
Emerson Electric Co.(EMR), a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. Emerson Electric has raised dividends for a record 52 consecutive years. The company trades at 15.3 times earnings, has an adequately covered dividend and yields 3.50%. (analysis)
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Johnson & Johnson has raised dividends for a very impressive 47 consecutive years. The company trades at 13.3 times earnings, has an adequately covered dividend and yields 3.20%. (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, and franchises operates McDonald’s restaurants in the food service industry worldwide. McDonald’s Corporation has raised dividends for 32 years in a row. The company currently trades at 14.90 times earnings, has very well covered dividend payments and yields 3.60%. (analysis)
Just because a company has raised distributions for a long period of time however, this doesn’t mean that the current yield is going to be excessive. It is the fat yield on cost that long-term dividend investors are after. Also remember that companies cannot control its yield, which is a function of the stock price. Companies could however maintain a proactive dividend policy, where they strive to continuously raise distributions year in and year out.
Some dividend investors also completely ignore capital gains in the equation. While it is true that dividends typically account for 40% of the average annual stock market total returns, it is important to note that the remaining 60% have come from capital gains. The companies listed above not only have adequately covered dividend payments and decent current yields, but they also have strong capital appreciation characteristics.
Disclosure: Long ABT, ADP, CLX, EMR, JNJ, MCD and PEP
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This article has 25 comments:
MMLP $25.10 12.1% Hold , LINE $22.04 11.9% Strong Buy
KMP $53.15 8.0% Buy ,
EEP $43.70 9.2% Hold, EEQ $43.35 7.2% Hold
ARLP $33.91 9.1% Hold , NRGY $27.77 9.6% Strong Buy,
EPD $27.68 8.1% Strong Buy
NAT 6.3 percent
Unless you're buying them in a tax advantaged account like a Roth IRA, the dividends are taxable. These sub-4% returns are less than inflation and taxes. Plus they have risk.
Last week I put a small chunk into a fixed Allianz annuity with a 10% bonus, guaranteed 7.5% annual interest PLUS it has an opportunity for market gains, should there be any. The interest accumulates tax free. It is GUARANTEED to at least double in less than 10 years. And it is written by a RESERVE insurance company. Not one person has ever lost a penny with a reserve product. No risk. It is semi-liquid, you lose the bonus and pay a penalty to close it. If I die, it goes tax free to my kids.
I don't have enough money to buy risky low-return dividends that don't keep up with inflation and taxes. So I don;t "get" these piddling dividend stocks.
Yes, there are many kinds of annuities, most of which are risky and written by non-reserve companies. Yes, you have to know what you're buying. But in this market and what I see on the horizon, I see no future for sub-4% dividends to keep up with inflation and taxes.
I have no interest in Allianz.
On Sep 10 09:42 AM axelrod608 wrote:
> You can get "returns" like this from a CD without the risk of share
> price dropping.
>
> Unless you're buying them in a tax advantaged account like a Roth
> IRA, the dividends are taxable. These sub-4% returns are less than
> inflation and taxes. Plus they have risk.
>
> Last week I put a small chunk into a fixed Allianz annuity with a
> 10% bonus, guaranteed 7.5% annual interest PLUS it has an opportunity
> for market gains, should there be any. The interest accumulates tax
> free. It is GUARANTEED to at least double in less than 10 years.
> And it is written by a RESERVE insurance company. Not one person
> has ever lost a penny with a reserve product. No risk. It is semi-liquid,
> you lose the bonus and pay a penalty to close it. If I die, it goes
> tax free to my kids.
>
> I don't have enough money to buy risky low-return dividends that
> don't keep up with inflation and taxes. So I don;t "get" these piddling
> dividend stocks.
>
> Yes, there are many kinds of annuities, most of which are risky and
> written by non-reserve companies. Yes, you have to know what you're
> buying. But in this market and what I see on the horizon, I see no
> future for sub-4% dividends to keep up with inflation and taxes.
>
>
> I have no interest in Allianz.
www.anapolschwartz.com...
On Sep 10 10:16 AM jarco wrote:
> They must be robbing banks or investing in very risky drivatives
> to guarantee those kinds of returns. Think about it. All thats after
> paying very high sales commissions, management fees, adminstrative
> fees, and insurance premiums.
The Allianz annuity is a good idea. And I would agree that sub 4% dividends, unless you are investing for capital appreciation or company growth, aren't worth the bother. You can get as much in a high yield savings account with zero risk.
Another good idea for tax-advantaged interest income is to invest in municipal bond CEFs. Even with a 1% or more management fee, many of these are yielding 7% or more tax-free, which equals to about 10% taxed equivalent. Even better, many are dividend raisers, so your yield remains intact even as the stock appreciates. The drawback is capital gains, which will be taxed, and brokerage fees, but municipal bond CEFs are slow growers, so capital gains tax for me has been minimal.
On Sep 10 09:42 AM axelrod608 wrote:
> You can get "returns" like this from a CD without the risk of share
> price dropping.
>
> Unless you're buying them in a tax advantaged account like a Roth
> IRA, the dividends are taxable. These sub-4% returns are less than
> inflation and taxes. Plus they have risk.
>
> Last week I put a small chunk into a fixed Allianz annuity with a
> 10% bonus, guaranteed 7.5% annual interest PLUS it has an opportunity
> for market gains, should there be any. The interest accumulates
> tax free. It is GUARANTEED to at least double in less than 10 years.
> And it is written by a RESERVE insurance company. Not one person
> has ever lost a penny with a reserve product. No risk. It is semi-liquid,
> you lose the bonus and pay a penalty to close it. If I die, it goes
> tax free to my kids.
>
> I don't have enough money to buy risky low-return dividends that
> don't keep up with inflation and taxes. So I don;t "get" these piddling
> dividend stocks.
>
> Yes, there are many kinds of annuities, most of which are risky and
> written by non-reserve companies. Yes, you have to know what you're
> buying. But in this market and what I see on the horizon, I see
> no future for sub-4% dividends to keep up with inflation and taxes.
>
>
> I have no interest in Allianz.
You are in the "FREE LOOK" period right now (if you don't know what the free look is ask someone other than the person who sold this to you what it is). Do yourself a huge favor and look at the SEC website that warns about these products (which are sold as an investment, but are really nothing but an insurance policy dressed up to look like an investment.) Also review the nightline investigation and the AARPs warnings about these products. Just be sure you fully understand this. Most people I know who have bought these are greatly dissapointed when they begin to discover what they really have and what the "costs" are.
A good rule of thumb is -- if it is too complex for you to really understand how it works, you probably should not own it. The studies that have been done show that most insurance sales people really do not have a good grasp on the product they are selling. And remember, an insurance product does not have a prospectus!
FREE LOOK and live.
On Sep 10 09:42 AM axelrod608 wrote:
> You can get "returns" like this from a CD without the risk of share
> price dropping.
>
> Unless you're buying them in a tax advantaged account like a Roth
> IRA, the dividends are taxable. These sub-4% returns are less than
> inflation and taxes. Plus they have risk.
>
> Last week I put a small chunk into a fixed Allianz annuity with a
> 10% bonus, guaranteed 7.5% annual interest PLUS it has an opportunity
> for market gains, should there be any. The interest accumulates tax
> free. It is GUARANTEED to at least double in less than 10 years.
> And it is written by a RESERVE insurance company. Not one person
> has ever lost a penny with a reserve product. No risk. It is semi-liquid,
> you lose the bonus and pay a penalty to close it. If I die, it goes
> tax free to my kids.
>
> I don't have enough money to buy risky low-return dividends that
> don't keep up with inflation and taxes. So I don;t "get" these piddling
> dividend stocks.
>
> Yes, there are many kinds of annuities, most of which are risky and
> written by non-reserve companies. Yes, you have to know what you're
> buying. But in this market and what I see on the horizon, I see no
> future for sub-4% dividends to keep up with inflation and taxes.
>
>
> I have no interest in Allianz.
Your url to the lawyer that's suing Allianz about DEFERRED annuities has nothing to do with what I said.
Anybody that puts 100% of their life savings into ANY investment based solely on the word of a sales rep is an idiot. We all know that.
As for Allianz' ability to make enough money to pay decent returns, check it out. Allianz makes Warren Buffet look like a small business in comparison. Buffet gets sweet deals because of the size of his assets. Allianz gets sweeter deals.
I just don't understand why there is so much attention devoted solely to the stock market when there are MANY other legitimate ways to invest. TRUE diversification involves investing in many sectors, many different vehicles and products. If you have 100% of your money in stocks, and the bonds of the same companies, no matter how many different ones you have, you are NOT diversified.
Finally, there are MANY kinds of annuities. Most are tailored to one type of investor or another. They grow, pay and save in many different ways. NONE of them are perfect for all situations. And an ignorant annuity buyer is no less at risk than an ignorant stock buyer.
Let's be careful out there.
What is insurance for? For me, it is for risk transfer. I have a risk, and I want someone else to cover it.
As soon as an insurance salesperson starts telling me that my insurance is an investment and not risk transfer, I would be heading for the door.
Peace!
On Sep 10 09:42 AM axelrod608 wrote:
> You can get "returns" like this from a CD without the risk of share
> price dropping.
But CD's don't benefit from the compounding that stock dividend investing/re-investing gives you.
I own a few (7 to 10) dividend paying stocks and re-invest the dividends, building shares and dividend returns over time. I don't worry too much over NAV price, but I do try and get a good entry point. I try to buy the companies that have no debt/lots of cash, have been around for a very long time and are lkely and able to continue raising their dividends.
I also have 2 CD ladders that also over time increase their averge return due to replacing the current maturing CD with a 4 to 5 year CD which typically has a higher coupon rate.
I have other investments too, but no annuities. I just don't understand them well enough to feel comfortable investing in them.
My 2 cents.
Tell me if I'm crazy, because I'm always eager to learn more.
People who don't know the depth and breadth of the annuity choices out there would be better served educating themselves rather than dismissing an integral part of the investing market.
Or, perhaps the bad rap on annuities is the stockbrokers' way of discouraging business away from themselves.
There are good and bad stocks, good and bad annuities. To say all stocks or all annuities are bad is just wrong.
No mas.
As for taxes on these if they are not in a IRA or Roth and not a MLP which you pay taxes on when you sell such as Kinder Morgan, (KMR) perform much like a stock split.
So not all dividend stocks cause you to pay taxes on them each time they distribute. And if you hold them in retirement funds even better.
Most Money Market funds are paying under 1% now so these lower paying dividend stocks are still better than cash especially if you bought them last year when the market crashed. They have returned 50% since then. And if you reinvested your dividends you even made more money compounded your investment.
You have to ask yourself what does the annunity invest IN---to get that kind of gain without Risk---
On Sep 10 11:30 AM secmaven wrote:
> Be aware that high dividend paying stocks are likely to cut the dividend.
> GMR paid well for years out of its cash flow, not earnings, and dropped
> 75% of its dividend with the explanation that it needed to accumulate
> some cash. But strange things sometimes happen Advantage Energy
> Trust (a natural gas CAN ROY) eliminated its dividend entirely and
> the stock doubled. Atlas Pipeline used a $4.00 dividend promise
> as a lure to raise money from the big boys at $40.00 in an acquisition
> scheme. Assets were purchased at inflated prices and the stock cratered
> to 2 and change..now trading at 6 but no dividend.
And yes, I do plan to get a variable index annuity soon.
mariposa
On Sep 10 09:42 AM axelrod608 wrote:
> You can get "returns" like this from a CD without the risk of share
> price dropping.
>
> Unless you're buying them in a tax advantaged account like a Roth
> IRA, the dividends are taxable. These sub-4% returns are less than
> inflation and taxes. Plus they have risk.
>
> Last week I put a small chunk into a fixed Allianz annuity with a
> 10% bonus, guaranteed 7.5% annual interest PLUS it has an opportunity
> for market gains, should there be any. The interest accumulates
> tax free. It is GUARANTEED to at least double in less than 10 years.
> And it is written by a RESERVE insurance company. Not one person
> has ever lost a penny with a reserve product. No risk. It is semi-liquid,
> you lose the bonus and pay a penalty to close it. If I die, it goes
> tax free to my kids.
>
> I don't have enough money to buy risky low-return dividends that
> don't keep up with inflation and taxes. So I don;t "get" these piddling
> dividend stocks.
>
> Yes, there are many kinds of annuities, most of which are risky and
> written by non-reserve companies. Yes, you have to know what you're
> buying. But in this market and what I see on the horizon, I see
> no future for sub-4% dividends to keep up with inflation and taxes.
>
>
> I have no interest in Allianz.
On Sep 10 02:08 PM axelrod608 wrote:
> I can see this is about as productive as the "health care debate".
> So tell me why, all you naysayers, every textbook on family finance
> has a section on annuities ? Why did Ben Bernanke put the majority
> of his net worth into annuities ? Is he a financial dummy ?
>
> People who don't know the depth and breadth of the annuity choices
> out there would be better served educating themselves rather than
> dismissing an integral part of the investing market.
>
> Or, perhaps the bad rap on annuities is the stockbrokers' way of
> discouraging business away from themselves.
>
> There are good and bad stocks, good and bad annuities. To say all
> stocks or all annuities are bad is just wrong.
>
> No mas.
Try this --
Google -- "equity index annuity warnings"
or "equity undex annuity SEC"
or "equity index annuity AARP"
There are a plethora of warnings from FINRA, SEC, AARP, Consumer groups, investment sites... if you still like the EIA after you educate yourself, go for it. But it you haven't done all of your homework, you deserve the product that you get.
There is a place for variable annuities and fixed annuities, I have not yet found equity index annuities to have a role that could not be filled with a better product!
Use your FREE LOOK period to do all of your due diligence.
On Sep 10 02:08 PM axelrod608 wrote:
> I can see this is about as productive as the "health care debate".
> So tell me why, all you naysayers, every textbook on family finance
> has a section on annuities ? Why did Ben Bernanke put the majority
> of his net worth into annuities ? Is he a financial dummy ?
>
> People who don't know the depth and breadth of the annuity choices
> out there would be better served educating themselves rather than
> dismissing an integral part of the investing market.
>
> Or, perhaps the bad rap on annuities is the stockbrokers' way of
> discouraging business away from themselves.
>
> There are good and bad stocks, good and bad annuities. To say all
> stocks or all annuities are bad is just wrong.
>
> No mas.
Axelrod698 I almost forgot to remind you to ask "Who gets the dividends?" In an EIA, you do not get the dividends. Since dividends make up 40 - 60% of an equity portfolios long term return, the fact the the insurance gets to keep your income in an EIA is not a big sales point. I bet they didn't mention that to you either, did they?
In a Variable Annuity with subaccounts you get the dividends.
Again, there is a difference in annuities. Educate yourself on the kind that you have.
Use your FREE LOOK before time runs out!
If the insurance company goes under, so does your investment. Think AIG. In today's environment, there's no such thing as guaranteed. Don't fool yourself.
On Sep 10 11:40 AM axelrod608 wrote:
> jarco - as I said, >>"Yes, there are many kinds of annuities, most
> of which are risky and written by non-reserve companies. Yes, you
> have to know what you're buying." >>
>
> Your url to the lawyer that's suing Allianz about DEFERRED annuities
> has nothing to do with what I said.
>
> Anybody that puts 100% of their life savings into ANY investment
> based solely on the word of a sales rep is an idiot. We all know
> that.
>
> As for Allianz' ability to make enough money to pay decent returns,
> check it out. Allianz makes Warren Buffet look like a small business
> in comparison. Buffet gets sweet deals because of the size of his
> assets. Allianz gets sweeter deals.
>
> I just don't understand why there is so much attention devoted solely
> to the stock market when there are MANY other legitimate ways to
> invest. TRUE diversification involves investing in many sectors,
> many different vehicles and products. If you have 100% of your money
> in stocks, and the bonds of the same companies, no matter how many
> different ones you have, you are NOT diversified.
>
> Finally, there are MANY kinds of annuities. Most are tailored to
> one type of investor or another. They grow, pay and save in many
> different ways. NONE of them are perfect for all situations. And
> an ignorant annuity buyer is no less at risk than an ignorant stock
> buyer.
>
> Let's be careful out there.