Its A Dividend World

Stocks with large dividends have been rising while those without have been treading water at best. There is a strong preference in the market for stocks that pay dividends. With interest rates so low there are few places in the world investors can get yield so they are going to the stock market. The performance chasers are starting to clamor for dividend stocks as well.

Google is growing at 20% a year and trades at less than 11 times next years FCF to EV, while many stodgy stocks that pay high dividends trade at nearly twice the valuation. There is an advantage to companies that pay dividends in that the risk that management blows the money is greatly reduced. But at some point it makes sense to buy their non dividend paying counterparts.

I believe that high dividend paying stocks are trading too rich but this is a trend that could continue. Over time this valuation gap is likely to close but predicting when this will occur is difficult. Large repurchases, initiations of dividends and takeovers of non dividend paying companies could potentially close this gap. In the meantime it makes sense to be cognizant of this trend. Buying companies that initiate sizable dividends and trade at low valuations may be a way to arbitrage this trend.

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