Here is an interesting article from Plan B Economists on Seeking Alpha that I translated for you. You can find investors all over the Internet who believe that dividend-paying stocks are in a bubble situation. Referring to other bubbles in the past, their idea is that these stocks will collapse when investors start selling because of a rise in interest rates. Let's take a little time to look at this question, see things with perspective, and above all, base ourselves on facts. What is the real situation today with dividend-paying stocks?
1. Valuations
Let's separate the non-payers and the dividend payers within the S&P 500 Index. Let's calculate then the average of the P/E ratio, the forward P/E and the P/S ratio. The results are presented in the table below. As you can see, the average P/E ratio for non-dividend payers is almost double that of dividend payers. We see a similar result for the forward P/E and P/S ratio.
In the dividend payer category, there are 188 stocks with forward P/Es of 10 or less. These 188 stocks have an average yield of 2.78%. In this group, there are several excellent examples of dividend payers with cheap valuations:
- Caterpillar ( CAT ): Yield 2.44% / Forward P/E of 9.81
- Wells Fargo ( WFC ): Yield 2.67% / Forward P/E of 9.09
- Chevron ( CVX ): Yield 3.41% / Forward P/E of 8.65
- Microsoft ( MSFT ): Yield 3.46% / Forward P/E of 8.22
Nothing to do with stock valuations during some historical bubbles, such as the tech bubble of the late 1990s which saw P/E ratios reach 100 and above.
2. Distribution rate
Payout ratios are low to moderate relative to historical ratios. In the dividend payers category the average ratio is 62.69%. This is a reasonable distribution rate. In other words, companies that pay dividends do not do so at the expense of their own operations.
The data below shows the distribution ratio for the S&P 500 since 1871. While it is very volatile over time (because earnings tend to be cyclical), there is a clear downward trend illustrated by the black trendline. This suggests that in addition to being at reasonable levels today, payout ratios are historically low and have room to grow. If current levels are reasonable, and therefore payout ratios can grow, then yields are not stretched and dividend stocks are not in a bubble.
3. Interest rate
Interest rates are historically low and are unlikely to go any lower. Some people therefore believe that they will soon increase, leading to a decrease in certain fixed cash flows such as dividends for stocks and coupons for bonds. However, today, The economy could not support much higher interest rates. Central banks are pressing all the monetary buttons to keep them as low as possible.
Some claim that we are in a period of "financial repression" like that which prevailed during the years from 1940 to the end of the 1950s. During this period, interest rates were kept artificially low for an extended period of time in order to help the U.S. government pay off the real value of the public debt accumulated during the Great Depression and World War II. History shows that interest rates can stay this low for a very long time. Today, with the level of indebtedness of European and American countries, we are still very far from an increase in interest rates.
Conclusion
Talking about dividends in a bubble is somewhat paradoxical. Indeed, one of the characteristics of a bubble is that stock prices rise to astronomical levels. As stock prices rise, dividend yields fall. Therefore, if dividend stocks were truly in a bubble, yields would fall to the point where no one would want to buy them.
Source: http://seekingalpha.com/article/1052841-are-dividend-stocks-in-a-bubble?source=feedDiscover more from dividendes
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P/E ratios and the payout ratio are indeed good for investors and I agree with you that we can stay at low rates over a long period. The problem lies elsewhere, it is in the extraordinary public spending, an American government that lives beyond its means, 1000 billion $/year. If the government were to reduce its annual spending by 500 or 800 billion $, what would be the impact on companies' results?
There would be an impact of course. But let's not forget that most companies offering growing dividends have a strong international exposure, especially in emerging countries that have fewer debt problems. On the other hand, and as the article says, one of the ways to resolve this debt is to weaken the dollar. A weak greenback is favorable to companies that are strongly oriented towards the outside world, like the ones that interest us.
This is a clear demonstration of the absence of a bubble at present. Can we therefore say that dividend stocks will perform well in the years to come? I don't think so. Because big caps with large dividends are very sensitive to rate hikes, and since they can only go up, even if it happens in 10 years, it is certain that inflation will weigh on their results.
No one is a fortune teller, but this fear of inflation further reinforces my belief in investing in crap rather than in big caps.
But it's all about vision: you're looking to increase your dividends, whatever the valuation. Whereas when you invest in crap, you're looking for added value and capital growth.
Otherwise, to return to the graph, aren't you afraid that dividend distribution rates will continue to fall? This slow downward trend is strange.
Thanks for your comment Tom. I would just qualify it by saying that in the big caps there are certainly those with high yield, but there are also, and these are the ones I prefer, those that offer an average and growing dividend. The reasonable distribution policy of these companies allows them to continue to pay their dividend over the long term, even in the event of a micro or macro-economic event, such as a rise in interest rates. This also answers your last question. Of course they pay less, but they do so sustainably, and the lower the distribution rate, the more room there is for future dividend growth, which is all benefit for the investor. It is true that this downward trend is a little surprising but we must not forget that in historical terms we are coming out of a long era where dividends were very frowned upon, an era punctuated by the Internet bubble. We must not forget that historically, on average, nearly 50% of total profitability comes from dividends. During the 90s this rate was down to only 20%, and before 1950 it could go from 50 to 100%! I think this downward trend should correct itself in the future, as investors have become wary of gains based solely on capital gains.