NEW YORK (AP) — Even fans of dividend-paying stocks acknowledge that they're looking riskier, a result of their own success.
Dollars are pouring into stocks of utilities and other companies that make regular payouts to their shareholders, because they're at the center of a few investment trends. Investors are not only hungry for income given the low interest payments bonds are offering; they also want investments that will hold steady when markets are shaky.
The rush has pushed up stock prices for dividend-paying companies faster than their earnings, which has sparked concerns that they're too expensive. Southern, the company behind Georgia Power and other utilities, trades at close to 18 times its expected earnings per share over the next 12 months, for example. That's above its average of 15.4 times over the last decade.
Scott Davis, who runs Columbia's Dividend Income mutual fund, hears the criticism. But he says that while dividend-paying stocks may be pricier than before, they still look better than other alternatives. Answers have been edited for clarity and length.
Q: Does it feel like there's a huge tide of investors chasing every bit of income that's in the market?
A: Yes. Because where do you go? Central banks have made it impossible to earn those types of returns in what people have traditionally done (such as bonds). What central banks around the world are doing is encouraging people to move out of those safe vehicles.
And, when I'm in a world where I'm being forced to step out of it, at least let me step into a company like Johnson & Johnson, a company that's been around since the 1880s and has a dividend yield that's higher than that of a 10-year Treasury and increased its dividend about 7 percent this year.
Q: But how much pause does that give you, these high price tags on dividend stocks, particularly utilities?
A: Does it make me worried? Yes. I can't say I don't sit there and think about it, but I don't think this is like 2000, where the valuations were just extreme. This is not a market trading at 30 times earnings. This is a market trading at 18 times earnings. Historically, it's been around 15 times earnings. So we could say, 'Yeah, maybe we could get a correction.' But it's not one where I see tremendous downside risk. It's not like a biotech stock, where I could see it get cut in half.
Q: You're not worried that a lot of people who used to be in bond funds are now in dividend-stock funds, and they could leave en masse when interest rates rise?
A: If you saw the yield on the 10-year Treasury above 2 percent or 2.5 percent (it was close to 1.57 percent Thursday afternoon), yeah, I think we'd see utility stocks trading at (a cheaper price-earnings ratio) than the S&P 500, rather than trade in line with it now. But I wouldn't expect it to be greater than a 10 percent correction.
I understand they're going to move with the Treasury market. I don't worry about a slight correction. What you do need to worry about, but you would need to worry about this with bonds too, is a significant rise in interest rates, one of well over 1 percentage point.
I don't think the risk in utilities is any greater than the risk in bonds. And utility stocks do something that a bond cannot do: They increase their payout each year.
Q: What would get you to pull out of utilities?
A: What would signal to me to get out of a company is if we're paying an outrageous amount for each $1 of cash flow it's producing.
Q: If it's not outrageous, you're certainly paying more now than you did five years ago.
A: Absolutely, but everything we do is relative. What's my alternative? To put my money in a safe-deposit box? In Europe, where there are negative rates on bonds, maybe I'd be better off getting the biggest bills I could and putting them in a safe-deposit box. But in this country, that's not the case.
You have to deal with the facts you have now, and the environment you're investing in now. When those things change, I'll have to change. But right now, it looks like we're in a world where the economy grows no more than 2 to 2.5 percent, and that probably means Treasury rates will remain at a low level for some time.
Low Treasury rates, low bond rates and slow growth is not a bad environment for dividend-paying stocks.