3 Overvalued Dividend Stocks to Avoid (and 3 to Buy Instead)

NEW YORK (TheStreet) -- In one way of looking at it, the S&P 500 is about 30% overvalued. The index's historical price-to-earnings ratio is 15.5, while its current price-to-earnings ratio is over 20.

That said, the market is made of individual stocks, some of which are still undervalued, while many are overvalued. This article features three dividend stocks that are trading at scary-high valuations. Investors should avoid these three dividend stocks until their respective valuation multiples come back down to a more reasonable level.

The three stocks in this article are all great businesses. They have long histories of rewarding shareholders and growing earnings-per-share. But this doesn't mean they are worth any amount of money one might pay. Dividend investors will do well to pay close attention to how much they are paying to own shares in a business. As Warren Buffett says, "Price is what you pay, value is what you get"

Don't overpay and get less than fair value for your money. The three stocks below are trading well above fair value.

Brown-Forman (BF.B)

Brown-Forman is the maker of Jack Daniel's, Southern Comfort, Finlandia, Canadian Mist, and Korbel and other popular spirits. The company's liquor brands are popular regardless of the economic climate. Brown-Forman is an exceptionally high quality business with a strong competitive advantage from its strong brands.

Unfortunately, the stock appears significantly overvalued at this time. Brown-Forman has a price-to-earnings ratio of 28.8, well above the S&P 500's price-to-earnings ratio. Brown-Forman's price-to-earnings ratio has nearly doubled since 2009 and yet has averaged less than 20 for 10 of the last 16 years. It is currently trading at its highest price-to-earnings ratio since 2006.

Brown-Forman's earnings-per-share growth over does not justify its lofty price-to-earnings ratio. The company has grown earnings-per-share at 8.4% a year over the last decade. These are solid results, but they come nowhere close to justifying a price-to-earnings ratio near 29. The company has a dividend yield of 1.5%. Brown-Forman is a Dividend Aristocrat and has increased its dividend payments for 31 consecutive years.

Investors can expect continued growth from the company's Jack Daniel's brand and other premium liquor brands. Analysts are expecting earnings-per-share to continue growing around 8.5% a year going forward. This growth combined with dividend payments gives investors an expected total-return of about 10% a year. If the company's valuation multiple reverts back to the high teens, current investors will see significant losses.

Yet, those looking to improve their dividend portfolio should consider other high quality beverage companies at this time, though ones that are better priced. Coca-Cola (KO) currently has a price-to-earnings ratio of 20 (nearly 30% lower than Brown-Forman's) with a dividend yield of 3.2% (more than double Brown-Forman's). Additionally, Coca-Cola is expecting 7% to 9% earnings-per-share growth and has a portfolio of 20 brands that generate $1 billion or more per year in sales.

"To me, Coca-Cola is intriguing because of the calls it has on the super-growth vehicle that is Monster and the potential home run that another company it has a stake in, Keurig Green Mountain (GMCR), might hit with its cold-drink process. Plus there's the nice 3% yield," writes Jim Cramer on Real Money

Read more about what Cramer and others have to say about . 

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