Morningstar’s Peters: Dividend Stocks Aren’t a Bubble

Dividend stocks have been on a tear over the past three years, leading some to question whether there’s a bubble in that space.

Josh Peters, editor of Morningstar’s “Dividend Investor,” isn’t one of them.

“I can't believe people are throwing the B-word around in my sandbox,” he says in an interview on his firm’s website. “I think the word bubble really doesn't work well for dividend-paying stocks, because if you go into the market, you're looking for a high yield.”

But once dividend stock prices go up, the first step toward a bubble, the yield comes down, until it’s not a high-yield stock anymore, Peters points out. And once it’s no longer a high-yield stock, investors seeking income will stay away.

“So, people focusing on dividend yield is actually a good pressure-relief mechanism,” he says. “It's telling you that the stock is becoming less and less attractive as it goes along.”

To be sure, there are some dividend stocks that are overpriced in the wake of the recent rally, particularly among real estate investment trusts (REITs), Peters says.

But when it comes to a bubble, “I'm not seeing that,” he says.

Some investors, frustrated with low interest rates, have replaced Treasury positions with dividend stocks. But Pimco’s star bond fund manager Bill Gross urges caution.

“Comparing Treasury yields to corporate stock dividends spans a huge gap of risk,” Gross tells Bloomberg. “Stocks can go down, too, just like bonds.”