When is it time to sell high and move on from a winning investment strategy?
Dividend investors may be asking that question. Over the last five years, the S&P 500 dividend aristocrats index, which includes companies with increasing dividends for at least 25 years, has posted an annualized return of 11.8 percent versus 4.8 percent for the S&P 500.
The popularity of dividend stocks has resulted in higher price-earnings ratios; a signal that stocks are expensive. Utility stocks trade at 19 times their earnings per share over the last 12 months, versus a five-year average of 13 times.
So, is it time to focus on the next trend? No, several strategists say. The reasons for dividend-payers’ popularity are only gaining in strength, Barclays strategist Barry Knapp says. Among the reasons he suggests for continuing to focus on dividend-paying stocks:
• Higher yields. Income-seeking investors are tired of low bond yields. The 10-year Treasury note yields 1.7 percent. Stocks in the S&P 500 offer an average yield of 2.2 percent and greater potential for price appreciation.
• Central bank stimulus. The Federal Reserve continues to buy bonds which has kept Treasury yields low. The Bank of Japan announced its own bond-buying program this month, which will lower the yield of Japanese government bonds. Barclays expects many Japanese bond investors will turn to U.S. bonds for greater returns, putting more downward pressure on U.S. bond yields.
• Stability. Average investors are returning to the stock market and they’re attracted to the protection that dividend-paying stocks tend to offer during downturns. In 2008, the S&P 500 lost 37 percent while the dividend aristocrats index limited losses to 23 percent.Associated Press