“Higher valuations may limit dividend payers’ upside, but there’s reason to think they still have room to run. First, bond yields are likely to remain low until at least 2014 (if the Fed gets its way), so income-producing stocks will remain one of the only places to find meaningful yield,” the investment researcher said.
Dividend ETFs outperformed the market last year but have been lagging in 2012 with investors favoring riskier sectors. “Investors should also remember that dividend-paying stocks don’t always behave like other stocks,” the Wall Street Journal reports.
Also, Vanguard Chief Economist Joe Davis cautions bond investors against blindly running to dividend stocks in search of yield. If investors substitute dividend-paying stocks for bonds to generate greater income, “the final result is a more aggressive and more stock-heavy strategic asset allocation” because stocks are riskier and more volatile than bonds, he said.
“If you hope to gain more income by increasing your allocation to higher-yielding bonds or dividend-paying stocks, you should be aware that your portfolio volatility will likely increase as a result,” Davis wrote at the Vanguard blog.
SPDR Dividend ETF (NYSEArca: SDY)
