Recent months have seen a huge surge of investment into dividend stocks, especially in the United States. A July Wall Street Journal article, "Investors Testing the Limits of Defence", noted that, in the prior three months, traditional dividend-paying industries including telecom (13.7%) and utilities (7.5%) had far outperformed the broad S&P 500 (-1.2%). According to EPFR Global, investors have plowed a net $16 billion into U.S. dividend equity funds in 2012, vs. $25 billion withdrawn from non-dividend funds. Some dividend-focused indexes like the S&P Dividend Aristocrats sit at or near all-time highs. According to the chief market strategist at AllianceBernstein, Vadim Zlotnikov, investors are paying 25% more for dividend-paying stocks than non-payers, the widest such gap on record:
"Investors are willing to pay an enormous premium for dividends.. it's a pretty crowded trade, but even a pretty crowded trade can work as long as money continues to flow in."
This has led some commentators to question whether a 'dividend bubble' may have started....
- Are Dividend Stocks the Next Bubble?
- Are we witnessing a Dividend Bubble?
- Is There a Bubble In Dividend Stocks?
- The next Bubble in the Making
What's Driving All This Dividend Lust?
In part, this rush into dividend land can be explained by macro-economics. In light of the persistent Euro crisis and doubts over the China growth story, the fear of a global slowdown is driving investor asset allocation out of economical sensitive sectors like technology into sectors considered more defensive like healthcare and consumer staples, which also tend to pay dividends because of their stability. However, clearly, the other major factor is the weight of retail money moving into the space. This is a function of the desperate hunt for income in a yield starved, low-interest world. In the US, the 10-year Treasury bond is near to record lows, and the average savings account now pays almost nothing. Those who invest for income are now moving up the risk ladder as they are so desperate to secure a decent income stream.
A Herding Crowd?
It's hard to tell if it's causal - or just a response to this trend - but another contributing factor is arguably the rise of Dividend Growth Investing (DGI) as a school of thought amongst retail investors. It's hard to pin down the exact…
