Dividend Stock Bubble: Is It Even Possible?

For the last several years the stock market and Dividend Stocks have been on an upward spiral. Their ascent was propelled by low interest rates and the mass-media, infamous for stalking the next great fad. Following the well-worn script, the media cheerleaders are slowly swapping their pom-poms for darts as they assume their next roles as naysayers.

Recently, the news has devolved from 'everyone should own dividend stocks' to 'watch out, dividend stocks are in a bubble.' For the astute investor, one must first ponder the question: 'is it even possible for a dividend stock bubble to exist?' Let's explore this question...

Where's The Paradigm Shift?

Think back to the Tech. Bubble and the rhetoric being spewed before it busted. You heard things like 'it's the new-normal' and there has been a 'paradigm shift' when experts tried to explain why ultra-high double-digit P/Es shouldn't alarm investors.

Where are the media experts saying high double digit P/Es on the leading dividend stocks are the 'new normal?' Oh, I guess the P/Es haven't quite reached ultra-high double digits.

Yield: The Ultimate Governor

Why do people buy dividend stocks (Hint: They are not looking for unbridled growth)? Of coarse, investors  in dividend stocks are looking for income.

Q: What happens when the price of dividend stocks skyrockets?
A: Yield (and income) plummets for new investments.

When a dividend stock's price disproportionately increases and its yield declines, new investors will shy away and current investors will consider selling. This self-correcting mechanism will keep dividend stocks out of bubble-land.

In Closing:

Finally, if there was a dividend stock bubble and it popped would that be a bad thing? For the dividend stocks you held when the bubble popped, the income must have been at a sufficient level, otherwise you would have sold them and purchased another stock. If you liked the stock at $x, you should really like it at $x-$y. Buy quality, and don't be afraid to hold it.

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