Dividend Stocks Not in Bubble, WisdomTree Says

Punch the phrase "dividend stock bubble" into Google GOOG and 3.55 million results come back in less than three tenths of a second. Apparently, the notion of a dividend stock bubble has crossed more than a few minds. Some analysts and investors have even begun characterizing consumer staples, health care, telecommunications and utilities names as richly valued. That may not be the case as new research from ETF issuer WisdomTree WETF points out. "We believe that three of these four high-dividend sectors are in reality relatively cheaper than they have been on average over the past 20 or so years," WisdomTree Research Director Jeremy Schwartz wrote in the note. "Given that we are discussing relative prices of dividend-paying stocks, we believe the best metric to gauge whether they are cheap or expensive starts with the trailing 12-month dividend yield3, which measures the relationship of a stock's price to the level of its dividends paid over the prior 12 months, as opposed to the P/E ratio." Amid a turbulent market environment in 2012, investors have flocked to ETFs tracking these sectors. Wednesday, the Consumer Staples Select Sector SPDR XLP and the Health Care Select Sector SPDR XLV are trading near all-time highs. Despite previous calls that utilities ETFs were looking expensive on a historical basis, the iShares Dow Jones Utilities Index Fund IDU and the Utilities Select Sector SPDR XLU are within spitting distance of new 52-week highs. "The two sector indexes with the highest trailing 12-month dividend yield spreads in the U.S. equity markets today are Telecom and Utilities," Schwartz said. "As of August 31, 2012, Telecom had the highest spread of any sector index, valued at 2.70%, while Utilities had the second-highest spread, at 2.05%.We believe slower growth potential would be a very good reason why trailing 12-month dividend yield spreads are currently higher for Utilities and Telecom. Sectors characterized by higher growth potential have tended to exhibit lower trailing 12-month dividend yield spreads." Schwartz notes that of the four aforementioned sectors, only utilities have a trailing 12-month yield that could make the group look expensive. IDU and XLU have trailing 12-month yields of 3.34 percent and 3.84 percent, respectively. Over the 20-year period ending August 31, 2012, telecom names had an average trailing 12-month yield of 1.54 percent, but that spread has grown to 2.7 percent, implying the sector is attractive, according to WisdomTree. Over the same period, the staples group sported an average trailing 12-month yield that was only 0.32 percent better than the S&P 500's. As of August 31, 2012, these stocks have a trailing 12-month dividend yield spread that is at .68%—again, signaling a relatively lower valuation than the sector's historical average, WisdomTree said. One option for investors looking to get decent exposure to all four sectors is the WisdomTree Equity Income Fund DHS. In order, health care, staples, telecom and utilities are the top four sectors weights in the WisdomTree Equity Income Fund, combing for about 65 percent of the fund's weight. DHS, which has $572.1 million in assets under management, has a 30-day SEC yield of 3.86 percent. Another ETF with ample exposure to all four sectors is the WisdomTree Dividend ex-Financials Fund DTN. Utilities and staples each receive weights of 12.8 percent in DTN. Telecom garners a weight of 11.3 in DTN while health care accounts for almost 11 percent of the fund's weight. The $1.2 billion ETF has a 30-day SEC yield of 3.77 percent. For more on ETFs, click here.