As the focus on dividend stocks remains, there may be a concern as to whether there is a dividend bubble being created. Matt Koppenheffer of the Motley Fool sets out to address this issue. He claims there is no dividend bubble. He 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. He concludes that while there may be individual stocks that are over priced, this is not generally true.
On the back of this, Matt goes on to select five dividend stocks to buy and five to avoid.
His five to buy are those who have a sustainable payout ratio and a reasonable valuation.
Company | Dividend Yield | Enterprise Value / Operating Income | Payout Ratio |
|---|---|---|---|
| Exelon (EXC) | 5.4% | 8.5 | 55.8% |
| Eli Lilly (LLY) | 5.0% | 7.2 | 50.1% |
| General Electric (GE) | 3.5% | 33.0 | 45.6% |
| Intel (INTC) | 3.1% | 7.3 | 31.9% |
| Eaton (ETN) | 2.9% | 12.4 | 34.2% |
And then there are those who have high valuations and high (unsustainable?) payout ratios.
Company | Dividend Yield | Enterprise Value / Operating Income | Payout Ratio |
|---|---|---|---|
| Southern Company (SO) | 4.3% | 14.0 | 72.7% |
| ONEOK (OKS) | 3.0% | 12.3 | 63.0% |
| Plum Creek Timber (PCL) | 4.3% | 26.8 | 140.9% |
| Kimco Realty (KIM) | 4.1% | 28.5 | 267.4% |
| Ventas (VTR) | 4.4% | 41.0 | 143.0% |
These companies are in energy (Southern, ONEOK) and real estate which is much more focused.
We will report on the two selections separately and measure them against our dividend bearing ETF portfolio:
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | (ICF) iShares Cohen & Steers Realty Majors |
| CASH | CASH |
| FIXED INCOME | (TIP) iShares Barclays TIPS Bond |
| Emerging Market | (VWO) Vanguard Emerging Markets Stock ETF |
| US EQUITY | (DVY) iShares Dow Jones Select Dividend Index |
| US EQUITY | (VIG) Vanguard Dividend Appreciation ETF |
| INTERNATIONAL EQUITY | (IDV) iShares Dow Jones Intl Select Div Idx |
| High Yield Bond | (HYG) iShares iBoxx $ High Yield Corporate Bd |
| INTERNATIONAL BONDS | (EMB) iShares JPMorgan USD Emerg Markets Bond |
- 5 Dividend Stocks To Buy -- Total of $10K invested equally in each stock
- 5 Dividend Stocks Not To Buy -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
| Portfolio/Fund Name | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | 1% | 1% | 14% | 10% | 77% | 8% | 61% |
| 5 Dividend Stocks Not To Buy | 3% | 21% | 101% | 38% | 148% | 8% | 21% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 5% | 3% | 18% | 20% | 133% | 3% | 12% |
| 5 Dividend Stocks To Buy | 6% | 6% | 23% | 25% | 111% | 2% | 3% |
This highlights the problem of overpriced stocks -- they became overpriced because their returns have been strong and this shows up in this chart. It looks as if the dividend stocks not to buy have a great future behind them and the stocks to buy have an uncertain future in front of them. Over the long term, the returns and the risk aren't really ones that are appealing.
Three Month ChartKnowing what I know from the report -- that the stocks not to buy are expensive and have unsustainable payout ratios, I would be hesitant to invest in them. The ones to buy aren't compelling enough for me to want to go forward. I would want to investigate other dividend stocks (as we are doing in our dividend stock playoff articles) to see if there are better alternatives.
We will continue to track these stocks but this filter is not one I would use.
Disclosure: I am long INTC.
Additional disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
