“Due to flows, this is a good example of an asset class getting distorted and investors buying into something and getting something quite different than what they expected. This asset class, which historically trades at a 20-40% valuation discount to the overall market is now at record PREMIUMS. Dividends have worked historically because they have had a value tilt. What happens when they don’t? Buyer beware,” said Faber.
Confirming the notion that staples and utilities are pricey is an average P/E ratio of nearly 17 for the Consumer Staples Select Sector SPDR (NYSEArca: XLP) and the Utilities Select Sector SPDR (NYSEArca: XLU). The average P/E for the equivalent energy and technology sector SPDRs is less than 15.
Even the Financial Select Sector SPDR (NYSEArca: XLF), which is up 29% this year, trades at a discount to XLP and XLU. Proving that investors do not need to pay up for dividend growth, financials and tech have been the leaders of S&P 500 dividend growth over the past several years. [Ten ETFs With the Highest Yields]
Chart Courtesy: Empirical Research via mebanefaber.com
Tom Lydon’s clients own shares of DVY.