Are you chasing dividend stocks too far?

In the ongoing search for yield, investors have bid up the prices of stocks and equity funds that emphasize high dividend yields. Now, some analysts are saying the trend has gone too far.

The SPDR S&P Dividend ETF (SDY), which tracks the S&P High Yield Dividend Aristocrats index, returned 22.56percent for the 12-month period ending April 30, 2013, compared to 16.89 percent for the S&P 500. Since inception in 2005, this ETF has captured $12.4 billion in assets. Three other large dividend-focused ETFs – Dividend Appreciation Fund (VIG), Dow Jones Select Dividend Index Fund (DVY) and High Dividend Yield (VYM) – together have accumulated another $36 billion.

A growing number of U.S. companies are chasing dividend-minded investor by increasing payouts. According to FactSet, aggregate dividends per share of S&P 500 companies grew by 15.9 percent year-over-year in 2012. At the end of 2012, 81 percent of S&P 500 paid dividends in the trailing 12-month period – a 13-year high. FactSet’s analysis of recent trends in dividend payouts.

This dividend-is-your-friend trend is not always productive for companies or investors, says analyst Mebane Faber of Cambria Investment Management in a recent interview with Index Universe. According to Faber, paying dividends is just one of five ways a company can use cash to reward investors, and it is not always the most strategic or efficient way to generate return. The interview is available.

About the Author
Rich White

Rich White

Writer and sales training consultant with 25 years of experience in the financial services industry, White is the author of "12 Steps to Your Personal Success in the 401(k) and Small Plan Market," the leading retirement plan sales program in the industry. You can reach him at 914-380-4522 or by email at richwhite8@yahoo.com.


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