With sources of reliable income so tough to come by these days, investors seem to be chasing after yield. That has pushed up the valuations on many traditional dividend paying stocks. That trend is worth keeping an eye on.
Hopefully it will reverse sooner than later.
This article calls Southern Company (SO) and Verizon (VZ) the "poster children" of highly valued dividend payers.
(Though neither stock has performed all that well this year. In fact, Southern Co. stock is actually down slightly year to date. So these two came into 2012 rather pricey.)
Barron's: The Danger In Dividend Stocks
It's not just utility stocks like Southern Company and telecoms like Verizon (both sell for ~17x earnings).
Many stocks in the consumer staples sector are also no longer exactly cheap. They may not be late 1990s overvalued, but a bunch of them are hardly a bargain these days.
This article is focused on the fact that technology companies, historically not a big source of dividends, are now becoming meaningful payers. In fact, in terms of total dollars paid, the sector is now the biggest contributor of dividends to the index. That's hard to imagine when you consider how insignificant and rare dividends were among tech stocks around the time of the go-go technology bubble years.
Barron's: A New Approach to Income
Many dividend-oriented funds do not have a heavy weighting in tech stocks because the funds are based on indexes that require/favor a long dividend paying history. So it hasn't been easy to directly benefit from the increase in dividends without investing in the individual stocks.
(Though there's at least one fund that's trying to address this problem that's mentioned in the article. There will probably be more.)
While tech stocks may make the biggest dollar contribution of dividends to the S&P 500, the average yield for tech is still less than the average for the index itself.
Yet it's worth pointing out that the average masks the fact that some large cap tech stocks are now paying dividends approaching 3 percent and even more. More importantly, many of those dividends are backed by substantial free cash flows, pristine balance sheets, and dividend payout ratios that are relatively low.
So the capacity to increase dividends over time would seem to be there.
A comfortable dividend payout ratio is not an insignificant consideration. Utilities and telecom stocks may have higher dividends, but many have payout ratios that represent a substantial portion of earnings. Ultimately, it is the earning power that backs the dividend that matters.
Here's some more articles on tech stock dividends:
USA Today: Who Woulda Thunk It? Tech stocks new dividend leaders
The New York Times: Finding Dividends in Unusual Places
Wall Street Journal MarketBeat Blog: Dividends and Tech Stocks: Silicon Valley All Grown Up
Of course, what matters most is whether those dividends can be sustained and grown over a very long period of time. For most technology businesses, it's hardly easy to foresee what will happen to their core franchises many years from now.
That's the big advantage to stocks in the consumer staples sector. Hopefully they'll get cheap again sometime soon.