Whispers of a dividend bubble have been spreading through Wall Street circles as some analysts are beginning to wonder aloud if there might be a bubble developing for dividend stocks. As the Motley Fool's Morgan Housel explains, the prices for dividend stocks have been steadily rising as investors search for higher yields than they can find in Treasury Bills.
"What's unique about Edison (EIX) and Altria (MO)? They pay enormous dividends," he wrote. "And starved of yield with interest rates near 0%, investors are tripping over themselves to get dividends these days. S&P 500 companies with the highest dividend payouts currently have the highest P/E ratios. In 2007, it was the other way around: Stocks that didn't pay dividends had far higher valuations.
But don't get too comfortable with the dominance of dividends. There's a bad precedent here. Last decade, the Federal Reserve kept interest rates far too low for far too long. Starved of income from Treasuries, investors were tempted to search for yield wherever they could find it, which back then meant subprime mortgage bonds. You know how that went."
There's no guarantee that Housel is right. It's true that dividends are an especially attractive element to any stock, and higher prices alone don't necessarily mean a bubble, according to Kevin Mahn, President and Chief Investment Officer at Hennion & Walsh Asset Management.
"I think what we’re finding now is any time that we see an asset class or a sector that’s run up in value, people tend to believe that it’s the next bubble," he said in an interview with Forbes.com's Kate Stalter. And I think bubble may have been an appropriate term for the mortgages in the subprime market, but trying to extend that analogy to gold or to dividend-paying stocks is a stretch from my perspective."
So what's an investor to do with these conflicting opinions about dividend stocks? Perhaps the best course of action would be to find those hefty dividends out there that still offer attractive P/E ratios! Any stock that's trading at an attractive price while still offering a hefty dividend should probably raise a red flag, but that doesn't mean they aren't worth exploring. So, here are five companies that have a dividend yield over 10 percent while still keeping their P/E ratios at attractive or at least reasonable levels.
Prospect Capital Corporation (PSEC)
Market Cap: $1.21 billion Dividend Yield: 11.05 percent P/E Ratio: 6.84
Prospect provides financial services, lending to and investing in middle market companies.
Rhino Resource Partners (RNO)
Market Cap: $488.90 million Dividend Yield: 10.70 percent P/E Ratio: 11.61
Rhino is a coal company primarily trading in steam coal for electric utilities.
Pzena Investment Management (PZN)
Market Cap: $414.70 million Dividend Yield: 12.10 percent P/E Ratio: 22.86
Pzena is an asset management company with assets in 13 different strategies applied across different market caps.
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