Friday, August 10, 2012

Are Dividend Stocks Overvalued and Riskier Than We Think?

I'm not the first to notice that if the Bush tax cuts are not extended in their present form that the tax rate on dividends for affluent investors will rise from 15% to 40%.  If that happens, that would seem to significantly reduce the appeal of stocks with the highest yields that have benefitted so much from the stretch for yield in the absence of attractive alternatives in savings deposits or government bonds.

Sectors that have been in particular demand are utilities and real estate investment trusts (REITs).  The electric utility sector is historically quite overvalued, and the dividend yields seem paltry to me given the heavy debt loads and high dividend payout ratios of the stocks.  REITs also are in this category, as most of the companies are serial issuers of stock, which dilutes existing shareholders.

Though some companies such as Apple are initiating dividends, the dividend yield on the S & P 500 is currently only 2%, compared to its long-term norm of 3.6%.  With steady consumer stocks such as Colgate-Palmolive and Coca-Cola selling at 18 times estimated 2013--not 2012--earnings per share, I am concerned that this area no longer offers significant value.

So even though a cursory look at the S & P 500's chart since the major low of early in 2009 indicates that the rally is intact with higher highs and higher lows, I still suggest raising cash now for better buying opportunities in the stock market at lower prices.

Steve Lehman

S & P 500:  1401

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