The S&P 500 is Overvalued These 10 Dividend Growth Stocks Are Not: Part 3

Introduction

The Great Recession of 2008 – which ended in the spring of 2009 – brought on one of the greatest and longest bull markets in modern history. For true value-oriented dividend growth investors, the recession created a virtual cornucopia of excellent dividend growth stock investment opportunities that existed until the end of August 2013. However, by the end of 2013 to current time most dividend growth stocks have progressively become more and more richly valued. As a result, at least two very dangerous scenarios have become manifest.

First, this long-running bull market appears to have created overconfidence and perhaps complacency in the minds of many investors. On the other hand, this long-running bull market has also begun to elicit fears that a bear market has surely become past-due. Consequently, the recent weakness in stock prices is being perceived by many as the correction (or start thereof) that they’ve been fearfully waiting for. When investors become anxious they also tend to become more reactive and even impetuous with how they handle their portfolios. In simple terms, anxiety breeds volatility which further adds to nervousness. The recent increase in stock market volatility supports this contention.

This brings me to what I fear is the second potentially dangerous scenario I referenced above. The recent selloff in the stock market has led some investors into believing that the market in general has now gone on sale. I would agree that stocks are cheaper today than they were a few weeks ago, but the real question is: have stocks gotten cheap enough to be attractive? Unfortunately, I suggest that the fact remains that most high-quality dividend growth stocks are still far from being available at fair value.

However, as I often posit: “it is a market of stocks and not a stock market.” Therefore, although most blue-chip dividend growth stocks remain overvalued, they are not all overvalued. With this series of articles, I will present 50 dividend growth stocks in 5 groups of 10 that currently appear attractively valued. As an aside, there are several additional companies that are getting close to fair value but are not quite there yet.

To summarize, although stocks in general have recently contracted, valuations for the most part remain high relative to historical norms and/or intrinsic value calculations. Therefore, from my value investor’s perspective, many best of breed dividend growth stocks are still too rich. Moreover, once investor sentiment changes from optimistic to pessimistic (and it may already have begun) the market could potentially overreact to the downside just as it has overreacted to the upside during this long-running bull market. I believe that this represents a significant short-term risk. Therefore, if this were in fact to happen, both volatility and investor anxiety are sure to be heightened. A simple awareness of this potentiality can assist the more levelheaded and prudent investor in remaining calm during tumultuous market environments.