The Biggest Red Flag for Dividend Investors

Many dividend payers have a reputation for being defensive stocks, meaning that they outperform during down markets. Historically, dividend stocks have done a good job of avoiding the full extent of losses during troubled times, especially those whose businesses are tied to industries that aren't as vulnerable to cyclical swings. In large part, that's because dividend stocks tend to lag behind in bull markets, as investors gravitate more toward the high-growth, high-risk cyclical companies that benefit so much during good economic times.

This time around, as the market has climbed, blue-chip dividend stocks have seen their valuations climb to what many see as unsustainable levels. Even companies whose growth prospects remain in question fetch healthy multiples to their earnings. The other thing to keep in mind with dividend stocks is that some of their popularity has stemmed from the inability of income investors to get enough cash flow from different types of investments. As interest rates start to rise, though, you could easily see a reversal of the multi-year flow of cash away from fixed income and into dividend-paying stocks.

Source: Motley Fool

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