Avoid These Pricy Dividend Stocks

Dividend Aristocrats – those companies that have increased their dividends for 25 or more years consecutively – seem ideal for the income investor. After all, their combination of reliable and increasing income is not to be found anywhere else.

Yet, like all other investment formulae, once discovered, it becomes overpriced.

Further, the compromises necessary to achieve such a long track record of increasing dividends may in fact weaken the companies paying them – and even cause the investments to be self-defeating. Thus, I suggest treating the Aristocrats with caution.

Recently, my colleagues Alan Gula and Chris Worthington both warned about Dividend Aristocrats, and I don’t want to become repetitive. That said, I do think this group is significantly overvalued, and that we need to be careful should we choose to invest in them.

The Inherent Flaws of the Aristocracy

Before World War II, there was essentially no inflation, and companies were thought to be doing very well if they simply maintained their dividends.

AT&T (T), then including all the regional Bell companies, became known as the ultimate “widows and orphans” stock by maintaining its annual $9 dividend from the 1920s through the Great Depression until 1958. By then, inflation was eating away at the value of the steady dividend income, so AT&T increased its dividend and split the stock in 1959.

Procter and Gamble (PG), which did well through the 1950s, had figured out the persistence of inflation a few years earlier, and so began annual dividend increases in 1954. That makes it the oldest (and therefore most aristocratic) of the Dividend Aristocrats.

Other stocks followed suit in the later 1950s, but the activity wasn’t thought especially significant until after the recessions of 1973 to 1975 and 1980 to 1982, which thinned out the list of companies that had been able to maintain their increases. Then, in the 1980s and 1990s, dividend investing became unfashionable. It was only after the crash of 2008 to 2009 that the group of “Dividend Aristocrats” achieved iconic status.