What Next for Dividend Paying Stocks?

Morningstar analyst Jeffrey Schumacher outlines what income investors can expect in the coming months

Jeffrey Schumacher 6 August, 2013 | 11:24AM

Dividend investing has been a popular investment style over the past three years as the search for yield drove investors into high yielding stocks. This search for yield was caused by a combination of factors such as changing demographics, low interest rates, uncertainty and low economic growth. These have fueled investors’ appetite for dividend paying stocks. Morningstar data shows that assets under management within the Global Equity Income category have risen sharply from EUR 8.5 billion in January 2010 to EUR 46.8 billion as of May 2013.

Of this amount, EUR 26.8 billion is attributable to inflows, but this also indicates that dividend stocks have rallied since 2010. Consequently, there are signals that specific areas of the high dividend universe are becoming too expensive. From this perspective, the hunt for income looks more like a scream for yield rather than a search for yield. Besides valuation concerns, dividend sustainability remains an issue, even for traditional dividend sectors. Finally, the possible tapering of QE3, the monthly $85 billion stimulus program of the Fed at the end of this year is another source of concern. The possibility of rising interest rates could affect financial markets and dividend stocks in particular. These trends point to a possible change in the dividend game.

Traditionally, dividend funds have a bias to high yielding sectors such as telecom, utilities, real estate and financials. Although a high yield is an attractive feature, it can also be a warning signal, especially for dividend investors. This became reality in 2008 when financials tumbled and dividends were either cut or, in some cases, scrapped altogether. The once reliable cash machines were no longer the cornerstone of dividend portfolios.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jeffrey Schumacher  is a Fund Analyst with Morningstar Benelux.

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