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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 (NYSE:EXC)5.4%8.555.8%
Eli Lilly (NYSE:LLY)5.0%7.250.1%
General Electric (NYSE:GE)3.5%33.045.6%
Intel (NASDAQ:INTC)3.1%7.331.9%
Eaton (ETN)2.9%12.434.2%
This is a selection of companies that are spread across a wide range of markets giving diversity.

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 (NYSE:SO)4.3%14.072.7%
ONEOK (NYSE:OKS)3.0%12.363.0%
Plum Creek Timber (NYSE:PCL)4.3%26.8140.9%
Kimco Realty (NYSE:KIM)4.1%28.5267.4%
Ventas (NYSE:VTR)4.4%41.0143.0%

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:

AssetFund in this portfolio
REAL ESTATE(NYSEARCA:ICF) iShares Cohen & Steers Realty Majors
CASHCASH
FIXED INCOME(NYSEARCA:TIP) iShares Barclays TIPS Bond
Emerging Market(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF
US EQUITY(NYSEARCA:DVY) iShares Dow Jones Select Dividend Index
US EQUITY(NYSEARCA:VIG) Vanguard Dividend Appreciation ETF
INTERNATIONAL EQUITY(NYSEARCA:IDV) iShares Dow Jones Intl Select Div Idx
High Yield Bond(NYSEARCA:HYG) iShares iBoxx $ High Yield Corporate Bd
INTERNATIONAL BONDS(NYSEARCA:EMB) iShares JPMorgan USD Emerg Markets Bond

Portfolio Performance Comparison
Portfolio/Fund NameYTD
Return
1Yr AR1Yr Sharpe3Yr AR3Yr Sharpe5Yr AR5Yr Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate1%1%14%10%77%8%61%
5 Dividend Stocks Not To Buy3%21%101%38%148%8%21%
Retirement Income ETFs Strategic Asset Allocation Moderate5%3%18%20%133%3%12%
5 Dividend Stocks To Buy6%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 Chart One Year Chart Three Year Chart Five Year Chart

Knowing 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.

More...

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.

Source: 5 Dividend Stocks To Buy, 5 To Avoid