Brian Stoffel of the Motley Fool looks into the impact of the popping of the dividend bubble. There can be no doubt that investors who see reduced returns from bonds have moved towards dividend producing stocks. This move has resulted in a rise in the value of dividend stocks and something of a rush towards increasing dividend payments. Whether the business can support those dividends, and whether these stocks are being overvalued is another question.
My expectation is that there is something of a bubble as many investors have rushed into dividend bearing stocks, and some of those companies are using dividends to push up their stock price and they are overpriced. When there is a correction, it is possible that the good will be pulled down with the bad and therein lies the opportunity for the long term investor.
If you are holding long term blue chip stocks, they will likely weather the storm and return to their rightful place. If you are still receiving dividends for income and the business is sound, then all is well as you wait for the stock to correct. If you are not needing the income and the dividends are re-invested in buying more stock, you might find that you end up being able to purchase great companies at depressed prices and you emerge with larger holdings. That's the theory that Brian is espousing, and it's an interesting one at least.
If nothing else, it is a salutary warning to realize that there is something of a bubble, and to be careful about your long term stock selection. Brian recommends three that he believes would be well positioned to weather any bursting of a dividend bubble.
Company | Dividend Yield |
|---|---|
| Coca-Cola (KO) | 2.8% |
| Procter and Gamble (PG) | 3.3% |
| AT&T (T) | 5.9% |
Source: Yahoo! Finance.
Three equities is too small for a complete portfolio, but it might be part of a larger portfolio. The companies are blue chip, dominant market leaders that are going to be around for a long time to come. This is certainly worth comparing with our ETF benchmark.
| 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 |
- 3 Stocks For the Dividend Bubble -- 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 Performance Comparison
| 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% | 2% | 22% | 10% | 77% | 7% | 54% |
| 3 Stocks For the Dividend Bubble | -1% | 9% | 63% | 15% | 97% | 4% | 17% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 4% | 2% | 14% | 18% | 103% | 2% | 7% |
We see good performance from these three equities -- bearing in mind that three is too small a selection for a complete portfolio but the risk adjusted return indicated by the Sharpe ratio is reasonable compared to the much more diversified ETF portfolios.
Three Month Chart One Year Chart
Three Year Chart
Five Year Chart
We know that these three stocks are likely to do well over the long haul. There may be a question as to whether they may be expensive at the moment, or if one should keep track and jump in when there is a correction. However, for the long term investor, the drop may be seen as an opportunity to grow the position if it does drop but have three excellent stocks if they don't
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
