The purpose of this article is to continue the conversation on SA about whether we are in a dividend bubble or if desire for dividends has hit a stage of “irrational exuberance.”
These are the articles that I could find, presented in chronological order. If I missed any, please share in the comments section.
Prieur du Plessis wrote an article entitled, “Are We Witnessing a Dividend Bubble?”
Tim McAleenan wrote an article entitled, “Dividend Stocks Defy Bubble Classification.”
Dividend Growth Investor wrote an article entitled, “We are not in a Dividend Bubble.”
I will leave deeper analysis of these articles up to you, but I certainly found them to be worthwhile.
The reason that these articles resonated with me is because even before I started seeing them, I had this gnawing feeling in the back of my head that dividends seemed to be rapidly gaining in popularity.
Why? Well, I rarely turn on CNBC anymore, but every time I do, I hear one of the talking heads touting the importance of dividends and pumping stocks like Procter & Gamble (PG), Pepsico (PEP), Johnson & Johnson (JNJ), etc. And, I have to admit: It seems like every day on SA, a new dividend devotee writes an article (Yes, the irony is not lost on me that I am now part of that lot).
Then, last week, without even trying, I stumbled upon this article: “For Investors it’s All About the Dividends.” It was on the USA Today homepage as one of their top stories. In case you are unaware of why this would bother me, let me explain: One of the ways used to spot a market “bottom” is when you see an article on the front page of a national publication declaring the end of the world. In this case, it could be seen as a “top” related to increased focus on dividends.
I tend to ascribe to the view of Reinhart and Rogoff that this time really is different; therefore, I believe that dividends will continue to be popular and, perhaps, grow in popularity. Additionally, I think that companies will look to increase dividends as a way to reward/satisfy shareholders who stick with them through this uncertainty and overall market volatility. Currently, I agree with Tim McAleenan and Dividend Growth Investor’s theses that you can still find plenty of cheap dividend payers/growers in which to invest.
As an example, here is a diverse list of quality dividend payers that are cheap. There are many different metrics that can be used to determine value; for the sake of this article, I will use P/E and 5 year average P/E.
BBL - BHP Billiton’s British-listed ADRs
- Sector: Basic Materials
- Dividend: 3.3 %
- P/E 7.8
- 5 year average P/E 14.1
- Comments: The stock is about 30% off of its 52-week high due to worries about slowing growth in China. Many respected analysts have expressed conflicting opinions about China’s future. I haven’t a clue what will happen, but I don’t mind getting paid while I wait.
INTC - Intel
- Sector: Technology
- Dividend: 3.3%
- P/E 11
- 5 year average P/E 17.2
- Comments: Intel is a great company with a pristine balance sheet, but the worry has been that they are the king of a failing PC market and have not gained traction in the growing cell phone market. However, with positive momentum from CES and recently announced partnerships, the stock seems to want to go higher.
EXC – Exelon
- Sector: Utilities
- Dividend: 5.3 %
- P/E 10.9
- 5 year average P/E 13.9
- Comments: Exelon operates the largest fleet of nuclear power plants in the U.S. and will soon begin a merger with Constellation Energy Group. Over the last few years, the share price has been held down by the company’s pension liabilities, the worries related to nuclear reactor safety, and the low price of natural gas. The company has a good plan in place to take care of the pension problems and I believe that nuclear will be a reliable bet for the future.
KO - Coca-Cola
- Sector: Consumer Staples
- Dividend: 2.7 %
- P/E 12.4
- 5 year average P/E 17.5
- Comments: Coke is a juggernaut of a company that can be counted on to have solid earnings and increase their dividend yearly. Future challenges for the company include continuing to grow and offering additional healthy choices.
TOT – Total
- Sector: Energy
- Dividend: 4.9%
- P/E 7.6
- 5 year average P/E 9.2
- Comments: Total is one of the remaining “Oil Majors.” The share price has plummeted due to the fact that it is based in Europe; however, it is important to remember that their revenue is not just generated in Europe but from all over the world.
Will dividends ever reach the stage of “irrational exuberance?” I don’t think so, but I have to admit, however, that the article in USA Today makes me nervous. So, I am keeping my eyes open. I suggest you do the same!
Information collected at market close on 1/18/12 from Yahoo and Morningstar.