January 6th, 2012
by Jeff Bailey, Y Charts
In a crummy market, and with fixed-rate investments paying next to nothing, dividend stocks have become very chic. Two very-recent illustrations of this trend:
Fortune magazine’s 10 Best Stocks for 2012 – following a 2011 list skewed to underperforming highflyers that, sadly, underperformed – is all about dividends. The 10 stocks’ average dividend yield is about 3% and even if the share prices don’t move, well, the companies are paying you to wait, as the old expression goes.
The Wall Street Journal on Monday, reporting on dividend stocks’ newfound popularity, included a warning from AllianceBernstein’s chief market strategist, Vadim Zlotnikov, that dividend stocks could take a tumble should the economy lurch back to life and growth stocks get moving again. High-dividend-paying stocks, the Journal noted, have historically carried a lower PE than non-dividend-paying stocks. But the dividend payers have crept up to be roughly equal to non-dividend payers this year, as investors who don’t traditionally buy dividend stocks have piled in.
Follow up:A common sense bubble?
With a tumble ahead? Or continued value for investors? One crucial measure is the dividend coverage, and the Fortune list performs very well on that score. Two of the 10 stocks, Apple (AAPL) and Goodyear (GT), don’t pay a dividend. One, Enbridge Energy Partners (EEP), basically pays out all it makes, so its coverage has little or no cushion, by design. But the seven others – Caterpillar (CAT), Halliburton (HAL), Intel (INTC), Johnson Controls (JCI), Lockheed Martin (LMT), Microsoft (MSFT) and Royal Bank of Canada (RY) – all have great coverage, with reported earnings per share far above payout levels.
Three reassuring examples:
The Fortune list also offers comfort because the PEs of this group are relatively low. There may exist overbought dividend stocks out there, as Zlotnikov warns, but the Fortune list seems carefully picked to avoid that trap.
YCharts Pro rates Apple, Caterpillar, Halliburton, Intel, Johnson Controls, Lockheed Martin and Microsoft as having strong fundamentals and being either fairly valued, or undervalued, on a historical basis.
The Fortune list, depending on the overall market’s 2012 performance, could easily underperform the S&P 500, but the dividends seem largely safe and the stocks far from overvalued.
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