Is The Dividend Mania Ending?

In the last couple of months, there’s been an unusually high number of stocks making new 52-week lows even though the S&P 500 remains 24% above its own 52-week low set last November. This disjointed type of internal market action is usually not healthy, but it can persist for awhile before the warning flag turns from yellow to red.

It should come as no surprise that the list of new lows is dominated by yesterday’s darlings, “bond-like” stocks. In particular, Utilities and REITs have been hammered. Chart 1 shows REITs (measured by the NAREIT Equity REIT Index) peaked on a relative basis just as the 10-yr. Treasury yield bottomed in July 2012. Utilities, on the other hand, made their cyclical relative strength high even earlier, in October 2011. In retrospect, this was an excellent early warning that the bull market in bonds was running on borrowed time.

However, not all of the stock market’s high yielders have been trashed. The S&P 500 Dividend Aristocrats—a relative strength winner for not only the current bull market, but over the past 13 years—have somehow managed to match the 16% YTD gain in the S&P 500. This is remarkable performance considering the big jump in competing bond yields, but we think the Aristocrats’ run is coming to an end—at least on a relative basis. Note the group’s “total return relative strength” (a measure we favor for high-yielding groups) has broken an uptrend line (Chart 2) that’s been in place since early 2012.

While we have only limited historical information on the S&P 500 Dividend Aristocrats, Jun Zhu has previously highlighted the inflated valuations now attached to high yielding equities within the S&P 1500 Composite. P/E ratios on the high yielders have always traded below the market’s P/E (as measured by the S&P 1500 median stock), but today’s P/E discount of 18% is smaller the long-term average discount of 25% (Chart 3). Given the length and intensity of investors’ love affair with dividends, this P/E discount will probably drop well below the long-term norm when the infatuation finally flames out.

Many investors, recognizing these historically high relative valuations, have shifted their emphasis away from high dividend yields and toward high dividend growth. We agree the “growers” don’t look quite as expensive as “yielders” in Chart 3, but we don’t think investors will bother to make much of a distinction when this portfolio concept falls out of fashion—an event that may have already begun.

© Leuthold Weeden Capital Management

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