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Are We Seeing a Dividend Bubble?


The so-called dividend aristocrats have recorded strong relative performance compared with the benchmark indices, raising the possibility.

Given the plethora of market uncertainties, investors have over the past few months started placing an increasing emphasis on dividend yield. In particular, multinational companies operating in regions or sectors that would enable them to grow dividends over the next few years have gained favor. These so-called dividend aristocrats have recorded strong relative performance compared with the benchmark indices, as illustrated by the relative price chart below of the S&P 500 High Yield Dividend Aristocrats Index versus the S&P 500 Index.


This trend raises the question: Are we seeing a dividend bubble?

I concur with the answer provided from across the pond by David Fuller, co-author of FullerMoney, as follows:

The short answer is not yet, but all good trends eventually develop some bubbly characteristics, of a greater or lesser degree. A number of high-yielding, multinational "Autonomies" have shown impressive relative strength this year. Two warning signs to watch out for are: 1) trend acceleration relative to their 200-day moving averages; and 2) price-earnings ratios that are clearly higher than most other sectors or the market generally.

Another test for these shares, for which I maintain current relative strength is understandable, will occur when a stronger overall market environment revives 'animal spirits' sufficiently for investors to chance their luck in small-caps and other laggards.

Also read The Wall Street Journal's recent article, "Dividend Stocks Become the Heroes – Shares Often Derided as for 'Widows and Orphans' Are Outdoing Their Lower-Yielding Cousins."

Editor's Note: For more from Prieur du Plessis, visit Investment Postcards.

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