Investors pursuing high dividend yields are paying a sizable premium today, judging from valuations of the biggest stock holdings across the 10 largest dividend-focused exchange-traded funds (ETFs). In fact, these stocks are trading in line with the valuations of their growth counterparts today.
And dividend payers are straining: they’re paying out almost 90% of their earnings. That leaves precious little to reinvest in the business in order to fuel future earnings growth—and feed future dividends. Earnings growth for this group of dividend yielders is projected to be about 30% lower than that of their growth counterparts. This situation seems unsustainable.
What are the takeaways for investors?
Don’t lock in on current dividend yield alone, and don’t ignore attractively valued, high-quality growth companies that reinvest in their businesses. These firms have the potential to deliver strong earnings and dividend growth—which should boost future income. Above all, take a stock-by-stock approach and select carefully, focusing on companies with strong fundamentals.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.