Just a short post to highlight the frothy premiums currently being bestowed upon the ‘slow and steady’ blue-chip dividend stocks at the moment. As central banks have successfully reduced yields on government and high grade corporate bonds to levels that will not sustain institutional funding or retirement income goals, investors of all stripes have flocked to dividend funds in their chase for yield.
Unfortunately, in the stampede for yield, investors in dividend stocks are overlooking the single most critical fact: valuations for the ‘bluest of blue chip’ dividend stocks, as measured by the Dow Jones Select Dividend Index, are now higher in aggregate than valuations for the broader market.
This must represent a profound source of consternation for traditional value investors, who must be enormously frustrated that their value bias can no longer be reconciled with a dividend focus.
Chart 2. Price to Earnings Discount of Dow Jones Select Dividend Index vs. Russell 1000
Source: Bloomberg
Source: Deutsche Bank
Chart 4. Low volatility stocks are substantially cheaper than dividend stocks
Source: Yahoo finance
Chart 5. When yields are adjusted for risk, rational investors would be agnostic about investing in low volatility versus high dividend stocks, but would prefer either to the market index
