Five Great Stocks Entering a Dividend Bubble

Make no mistake about a dividend bubble. A dividend bubble is much “less bad” than a valuation bubble. Go look at the price implosions of technology and Internet stocks after the dot-com bubble for proof of that. Imagining that a dividend bubble would be anywhere as bad as a valuation bubble just seems ridiculous. We even think that many of these companies will be able to keep raising their dividends ahead. These are all great companies, and that strength could even allow a dividend bubble to persist or even inflate a tad further. Still, our concern is that investors are simply having to pay up too much for these great dividends and the valuations of these great companies are getting stretched.

Also Read: The Best-Selling Products of All Time

The five stocks we identified that seem as though they are in a dividend bubble are as follows: AT&T, Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ); Altria Group Inc. (NYSE: MO); Kimberly-Clark Corporation (NYSE: KMB); and Wal-Mart Stores Inc. (NYSE: WMT). Amazingly, the analysts targets are higher than the current share prices in the utility sector, and it seems that those power giants may be able to keep hiking their payouts. We also took a look at some of the peers in this analysis. Here is why we see a dividend bubble in some of these great companies in America.

A Houston-based financial advisor named Bryon Townsend of WR Anderson & Co. recently has started to selectively lighten up on some key dividend stocks for some of his clients. He even told us, “My concern with high dividend paying stocks in this market is that many investors are making the mistake of paying 10% to 15% over 12 month price targets to chase a 3% to 4% dividend yield.”

Phones as a utility … AT&T, Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) have both risen well above our fair value targets, and frankly they are above Wall St. fair value estimates. Verizon trades at $44.75 and now has a 4.5% dividend yield. The consensus analyst target is down at $41.65, and shares trade at nearly 18-times expected 2012 earnings estimates with about 16% earnings growth expected. AT&T trades at $35.55 and it still has roughly a 5% dividend yield, but the consensus price target is down at $34.52. AT&T trades at about 15-times expected 2012 earnings estimates with only 8% earnings growth expected.

What is up with smoking in America? Altria Group Inc. (NYSE: MO) is the domestic-only play for cigarette and tobacco with a $72 billion market value. At $35.43, this stock has continued to rise above our old $30 to $32 target and shares hit a new high on Tuesday, up at $35.62. The dividend yield is now “only” 4.7% due to its price appreciation and the consensus analyst target is $33.36. Altria now trades at 16-times 2012 earnings estimates. The Altria rival of Reynolds American Inc. (NYSE: RAI) is at $45.80 and trades above its price target from analysts of $43.40, but it yields closer to 5.2% and it trades at about 15.5-times the expected 2012 earnings estimates.