Dividend stocks have done well, and we expect they will continue to do well. There are several possible explanations for their recent run. It may be due to the fact that dividends have been the major source of return since the Great Bull Market ended 12 years ago.
Further, the near-zero interest rate policy of our central bank has driven down yields on Treasury securities to the point where a 2% dividend looks juicy. Lastly, the rise of dividend stocks may simply be attributable to the fact that regular cash payments are a sign of financial strength in a world where governments and markets are struggling.
To me this says that regardless of the tax environment dividends will continue to be important. But given the market's rotation into dividend-paying stocks, price and valuation are important, too.
In our view, many utility companies have gotten a bit rich lately. Price earnings ratios have risen on solid companies like electricity provider Southern Company (SO), where the P/E ratio went from about 11x in 2008 to approximately 19x very recently.In contrast, the average P/E ratio of the S&P 500 stands at about 14x. In general, we don't like to see growth stock multiples on slow-growth utility companies and we believe the market will adjust this over time. Perhaps this process has begun as demonstrated by SO, which fell off a cliff at the beginning of this month. In general, it's never a good idea for tax implications to drive your investment decisions. True, dividends may be more highly taxed in the future, but they still will provide a level of return in the form of cash flow that is sorely needed by many retirees. Price is important and a portfolio of dividend payers must be managed very carefully. Presidents and their policies come and go but your needs as an investor must be met with what is available at the time. So for many individuals dividends aren't done and remain an integral part of their investment strategy. While were on the subject, below is a list of stocks to watch that also happen to pay a healthy dividend. Please keep in mind that we may own these shares in our customer accounts. Michael Shamosh co-authored this article. This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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