Be Careful With Widely Held, Richly Valued Dividend Stocks

Since Bernanke's testimony to Congress last week, interest rate-sensitive securities have had it tough. The mortgage REIT ETF (MORT) is down about 5%, utilities (XLU) are down 4.5%, and the long-bond (TLT) is down about 2.5%. This is relative to a mere 1.5% decline in equities (SPY). I don't see the bottoming in interest rates as a negative for broader stocks, as long as rates are starting to rise as a result of increased economic activity. As Barry Ritholtz at The Big Picture points out, we simply don't yet know why rates have begun to perk up.

Comparisons to the "nifty-fifty" era in which blue-chips were trading at 40-60 times earnings may not be justified, but many of these stocks will continue to sell-off as rates rise. 2% yields on the 10-year Treasury aren't yet compelling enough to catalyze a mass shift away from slow-growing stalwarts with big dividends, but we're on our way. Investors looking to get into these names should be excited about the dynamic under way as it should provide them with several opportunities to initiate positions with far more favorable return profiles and improved yields-on-cost.

Source: Seeking Alpha

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