Dividend Risks Inflating

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Investors cannot make any money in the bond market right now merely by buying and holding Treasury bonds forever. The problem is that Treasury yields are at record lows. In some parts of the developed world, those rates are selling at negative yields in some extreme cases as the public is choosing safety at any cost. This trend is again forcing income-oriented investors into higher-yield equities at the moment, but we want to warn about a broad-based dividend bubble that appears to be forming now.

The good news is that if you have been in these high-yield stocks for some time and seen massive appreciation, you probably will not feel much of a sting, even if the dividend bubble pops or slowly deflates. These companies paying the safer high yields are great companies with long track records. Many of these companies may even be able to keep raising their dividends. The other good news is that a dividend bubble would not at all look like a dot-come bubble bursting, as we saw from 2000 to 2003.

24/7 Wall St. has been tracking this trend of dividend investing for some time. The concern is over the price that new investors are paying to chase after these high dividends. At some point the payouts are just not enough reward for the amount of risk, and that is what we are starting to see today in many sectors and in many key stocks. A lot of these companies will be able to maintain their dividends or grow them, but with the economy softening up, a prudent investor should be asking how high of a price should be paid with new funds.