• Health Care had a negative 20-year average trailing 12-month dividend yield spread to the S&P 500 Index. As of August 31, 2012, the sector exhibited a positive spread of .09%—another spread level higher than its historical average, which signals a potentially attractive current valuation level.
One option for those concerned about potential valuation risk3 in U.S. Utilities may be to consider foreign Utilities,4 as they appear to be trading at discounts5 to both U.S. Utilities6 and their own histories. In my opinion, dividend stocks are not in, or near, a bubble. I am confident that there are still potential valuation opportunities in high-dividend sectors—even after their strong recent performance.
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1A comparison of the trailing 12-month dividend yield of a stock, sector or index to that of a broader index. Higher spreads indicate that prices are at lower levels relative to trailing 12-month dividends.
2The large number of constituent firms within each index contribute to making observed levels stable over time, relative to that of a single company.
3Specifically, that price levels of stocks within the S&P 500 Utilities Sector Index are high compared to trailing 12-month dividends, earnings, or any other financial metric. High current price levels may imply greater future risk.
4As represented by the MSCI AC World ex-US Utilities Sector Index.
5Specifically, foreign Utilities, as of 8/31/2012, have higher trailing 12-month dividend yields than U.S. Utilities and higher trailing 12-month dividend yield spreads relative to their own historical averages. Trailing 12-month dividend yield spreads of foreign Utilities are captured by subtracting the trailing 12-month dividend yield of the MSCI AC World ex-US Index from that of the MSCI AC World ex-US Utilities Sector Index.
6Refers to fact that the trailing 12-month dividend yield spread between the MSCI AC World ex-U.S. Utilities Sector Index and the MSCI AC World ex-U.S. Index is larger than that between the S&P 500 Utilities Sector Index and the S&P 500 Index.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.