Buy Dividend Stocks as Market 'Smells Like Speculation'

BOSTON (TheStreet) -- Contrarians, rejoice: Last year's most beaten-down stocks are among the biggest winners this year. And investors are buying them to chase the rally.

But nothing's changed, professional investors say. U.S. large-cap stocks that pay a dividend remain as attractive as they have been over the past year.

For example, stocks like Netflix(NFLX) and Bank of America(BAC), brutalized last year, are among the top performers on the S&P 500 this year. Meanwhile many of 2011's strong dividend winners, such as Philip Morris(PM) and Pfizer(PFE), are underperforming the broader market this year.

Such an end-of-year strategy isn't unusual, as investors are happy to book profits on their highest-winning positions and put some money to work on stocks that could bounce back. That's why the dividend stocks that returned 20% to 40% in 2011 are trailing while other companies that lost up to 40% last year are enjoying double-digit gains already this year.

Brian Peery, portfolio manager at Hennessy Funds, says he's surprised the stock market has done as well as it has this year, with the S&P 500 already up about 7% in little over a month's time. But by comparison, the Russell 2000 Index, which is a broad measure of riskier small-cap stocks, is up 12%. That shows investors have a greater appetite for riskier equities, a turnaround from only a few short months ago when dividend-paying stocks were highly sought after for income and safety.

Investors haven't completely rotated out of some of these dividend names, instead choosing to put cash to work to buy some of the rebounding names. However, Peery says investors are making a mistake if they're tuning out the negative headlines -- particularly those emanating from Europe -- and are buying into the so-called "junk" stock rally rather than looking at more stable investment ideas.

"That's a recipe for disaster," Peery says. "It smells more like speculation. I wouldn't want to load up my portfolio like that. That's why we're telling people to invest for the long term."