Dividend growth stocks are so 2011. Yesterday, a portfolio manager was interviewed on CNBC.
“What are you recommending?”
” We like high quality dividend growth stocks.”
“Everyone says that.”
Sometimes, “everyone” is not wrong. Perhaps because equities are generally out of favor, with net outflows of money from domestic equity funds, this popular investment theme is still reasonably valued, more than three years after we started to write about it. We took a list of 25 high-quality dividend growth stocks, with average dividend yields of 3.1%, and compared them with the S&P 500. Their average PE on trailing twelve month EPS was 15.18x, or a 13% premium to the S&P 500 trading at 13.42x. This is a very modest premium considering that these companies have above-average dividend yields, profitability, free cash flow and EPS growth, as well as superior stock price stability due to yield support. Furthermore, their PE premium has climbed only marginally since mid-February, from 10% to 13%.
So, yes, at this point dividend growth is an overaly familiar theme that puts the guys and gals on CNBC to sleep. But many dividend growth stocks are still reasonably valued and a good choice for investors who need yield as well as growth. The high-yield equities that do look expensive are “bond substitutes” such as telecom, utilities, and tobaccos, although some of them may well continue to be good investments.
Of course, it is not easy to identify good dividend growth stocks, because many companies fail to grow as rapidly as Wall Street expects. Many “growth stocks” turn out to be duds. Consult your financial advisor, preferably one who is supported by a first-class equity research department.
