All Dividends Are Not Created Equal

The various programs initiated by the Federal Reserve over the past several years have successfully pushed investors into riskier assets in search of yield. High-yield bonds are selling at all-time low levels, and even yields on 10-year Treasuries have fallen to about 1.7% over the last few weeks from nearly 2.1% on March 11. (The bond market seems to be more skeptical of economic and job growth than the stock market). Income investors have also recently bid up traditional defensive dividend-paying sectors like telecoms, utilities and consumer staples significantly. This has left these sectors trading at a premium to the overall market and put them at the high end of their historical valuation ranges.

I believe income investors are engaging in more risk than necessary to capture a 3% to 4% dividend yield. They would be better served looking at less traditional dividend-paying sectors like technology. Tech companies have not been big dividend payers historically; however, between 2007 and 2012 the proportion of dividends coming from the tech sector within the S&P 500 has grown to 14% from 6% of the total. Major tech firms such as Cisco Systems (CSCO) and Intel (INTC) have hiked dividends substantially over the years and now pay a yield similar to what can be expected in utilities and consumer staples, and sell at a much lower valuation....297 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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