Dividend Bubble?

Dividend Bubble?

Financial Times, Saturday edition, LEX Column.

Some extracts:

“Any observer of the markets must have grasped by now that it is possible to have too much of a good thing. After the tech bubble and housing bubble, are we witnessing a dividend bubble?”

The very notion is absurd to some value mavens who have long expressed a preference for dividend-paying shares. Lilliputian bond yields, however, are now pushing two particular types of buyer into such shares – income-hungry retail investors, such as retirees, and investment funds with a mandate to focus on current income.

Even if one accepts that dividend-paying stocks, especially non-financial ones, tend to be quality companies, dumb money can inflate them into bad investments.

It probably is too early to call a bubble but there are signs of froth. The reason dividend-payers outperform is that yield correlates with value characteristics. The reverse is not always true, though – particularly when it comes to entire categories such as master limited partnerships and trusts that have high-outs by default.

Investors not desperate for income might be better served by focusing on value rather than on yield.”

“Yield is NOT Value.”

Whenever I’m doing MarketCall ™, I try to say this line at least 10 times. Why? People will be hurt financially by paying too much for yield and nobody, in the Canadian media, seems to be saying this. Obviously this hunt for yield is happening all over the globe as illustrated in the Saturday edition of the, Financial Times talking about the UK market.

Have a look at the undernoted Canadian companies and their respective model prices. We are NOT saying these companies will collapse tomorrow, however it illustrates how far above fundamental value these companies are trading for investors to collect the yields they are offering. Again, this could go on for sometime however, when the world changes and the market rotates towards valuation these companies will be dead money at best, large capital losses at worst.




2 responses to “Dividend Bubble?

  1. Ed Baron January 23, 2012 at 9:45 pm

    In this statement, “Have a look at the undernoted Canadian companies and their respective model prices.” I was wondering if there was supposed to be a list of Canadian companies.

  2. ModelPrice Guy January 24, 2012 at 12:15 pm

    See the attached links, below the article.

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