Are dividend (and value) stocks too risky?

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Browser
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Are dividend (and value) stocks too risky?

Post by Browser »

A recent article points out that high-yield stocks may be more heavily overbought now than tech stocks were in the tech bubble. Since high-div stocks represent value stocks, I'm wondering if value might be in for an extended period of poor returns, and that maybe it's time to tilt toward growth stocks???
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Today’s favorite market theme lies in so-called safety stocks—particularly, in the US, those with high dividend yields. At their peak in September 2012, stocks with high dividend yields had a 44% weight in the S&P 500, their largest weight since 1970 and far above their 35% average.
http://blog.alliancebernstein.com/index ... -business/
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YttriumNitrate
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Re: Are dividend (and value) stocks too risky?

Post by YttriumNitrate »

Did you notice that in that chart every single past comparable peak was double or more the average? Currently the high dividend stocks are only 27% more than their average...I'm not saying the author is right, or wrong, but their comparables are a bit sketchy.
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RyeWhiskey
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Re: Are dividend (and value) stocks too risky?

Post by RyeWhiskey »

I noticed YttriumNitrate's point as well, but would like to add that the other examples are pure sectors (Energy, Financials, Technology) and a single country (Japan), whereas the current item is "High Dividend-Yield Stocks" which presumably spans all sectors and (if one was so inclined) individual countries. So I do think we're talking about apples and oranges here. One might also keep in mind that "value stocks" are not equivalent to "high dividend-yield stocks" as there are other components in what makes a stock value-ey.

All this said, I don't tilt to value/growth so it's not really an issue for me.
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larryswedroe
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Re: Are dividend (and value) stocks too risky?

Post by larryswedroe »

here is way I would think about it

Dividends are not a good predictor of value premium. Of all value metrics it is by far the worst.

So I would like at the p/b, p/cf, p/e type metrics and compare them to say DFA value fund as a benchmark to see how they are relatively valued. Can also compare them to say S&P 500 metrics

Hope that is helpful

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berntson
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Re: Are dividend (and value) stocks too risky?

Post by berntson »

If the market is disproportionately bidding up the price of companies with high-yield, one would expect them to start migrating out of value. If the price is going up for reasons other than the book value going up, then p/b will go up. You can see this with VNQ for example. The fund used to have a value tilt. Now it has a growth tilt because investors are bidding up high yield.

What I would not do is establish a value position by buying, say, a Wisdom Tree Dividend fund. I would like to have a value fund for emerging markets and might consider DGS, but I'm not going to establish a position until the Great Search for Yield has finished.

Many low p/b stocks are not high yield stocks, though high yield stocks are by and large low p/b stocks (see Larry's point above). And this makes sense. Suppose company A has established a typical dividend, but then finds its future earnings discounted by the market (i.e. finds itself with a low p/b ratio). The result is that it turns into a high yield company, as long as it keeps paying its usual dividend. On the other hand, suppose that a company with an ordinary dividend simply decides to pay a bigger dividend. This will make it a high-yield stock, but won't necessarily increase the price (as long the company has the same earnings, sales, etc.) nor decrease the book value. (I'm no economist, so this is me thinking out loud.)

On the other hand, maybe paying a higher dividend results in a lower p/b ratio over time? As a company pays out more of its profits, it has less to invest in its own assets and operations. But the price remains the same because of the dividend, so we get a lower p/b. In any case, the link between raising dividends and lowering book is not as direct as the link between lowering p/b (because of lower prices) and raising yield.
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Browser
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Re: Are dividend (and value) stocks too risky?

Post by Browser »

I'm also wondering if this concern would extend to Low-Vol funds. LV stocks tend to be high-div stocks, and we know that everyone and his brother is jumping on the LV bandwagon, including Vanguard. I've gotten into SPLV but am thinking maybe the party is over on these.
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RyeWhiskey
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Re: Are dividend (and value) stocks too risky?

Post by RyeWhiskey »

Browser wrote:I'm also wondering if this concern would extend to Low-Vol funds. LV stocks tend to be high-div stocks, and we know that everyone and his brother is jumping on the LV bandwagon, including Vanguard. I've gotten into SPLV but am thinking maybe the party is over on these.
Different horse it seems. But even still, I'd be more concerned about the recent fad of Low Volatility funds than 'value' in general. If you want less volatility add more bonds or stable assets, don't try and cherry pick stocks.
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larryswedroe
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Re: Are dividend (and value) stocks too risky?

Post by larryswedroe »

Browser
I wrote blog on the issue you raised about low volatility funds
their very nature has changed quite a bit

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Re: Are dividend (and value) stocks too risky?

Post by Stryker »

I don't know. I read the article, and it's not the first time that someone's mentioned dividend stocks being expensive over the last few years. Anything's possible, but unless companies start cutting their dividends en masse similar to the 1930's, then the dividend investor should have nothing to fear. In the event of investors dumping dividend stocks much like they did during the technology boom of the late 90's then dividend yields will simply go up as they did then and as long as the payout ratios remain normal then they will simply become more valuable to the investor who can reinvest into them.

I invest in a combination of both broad based indexes and individual dividend growth stocks in about a 50/50 split.
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nedsaid
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Re: Are dividend (and value) stocks too risky?

Post by nedsaid »

This is where a bit of contrarian thinking pays off. Right now everyone is yield chasing and in some cases the high dividend stocks are more expensive than the market itself. So at some point these stocks cease to be value stocks and the price bid up enough that they really aren't high dividend either.

When I bought individual stocks, I sought value characteristics first and dividends second. I certainly never bought a stock because it paid a high dividend. Indeed, a dividend yield higher than average for a company's industry might be an indication of trouble. For example, years ago I sold Occidental Petroleum when I determined that they were issuing new stock to help meet their dividend payments. This behavior made no sense to me, so I sold. The company could not sustain its dividend payments.

I noticed the same thing as other posters, that REITs are no longer in the value category. They are now core or even growth. That tells you this is yield chasing on steroids.

My expectation is that the returns of high dividend stocks, utility stocks, REITs, and other bond alternatives is likely to be subdued going forward. You have to invest in these things before they were cool. What we are seeing is another version of performance chasing.
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leonard
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Re: Are dividend (and value) stocks too risky?

Post by leonard »

Browser wrote:A recent article points out that high-yield stocks may be more heavily overbought now than tech stocks were in the tech bubble. Since high-div stocks represent value stocks, I'm wondering if value might be in for an extended period of poor returns, and that maybe it's time to tilt toward growth stocks???
Image
Today’s favorite market theme lies in so-called safety stocks—particularly, in the US, those with high dividend yields. At their peak in September 2012, stocks with high dividend yields had a 44% weight in the S&P 500, their largest weight since 1970 and far above their 35% average.
http://blog.alliancebernstein.com/index ... -business/
Should you market time and swap Value for Growth?

No.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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