Dividend stocks and related exchange traded funds have been a popular play this year as value investments returned to style. While some may be apprehensive of the category after the recent run up, dividend stocks are only still trading near their historical averages.
The SPDR S&P Dividend ETF (NYSEArca: SDY), which holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.39% 12-month yield, has increased over 16% year-to-date while the S&P 500 index has gained about 7%. Given the wide outperformance, many are beginning to question the dividend play ahead.
However, dividend stocks may be just starting to get into their groove.
“Relative to the broader market, dividend stocks are not overvalued,” David B. Mazza, Head of ETF and Mutual Fund Research at State Street Global Advisors, said in a research note. “Dividend stocks are now just inching back up toward their recent averages.”
Dividend stocks are now trading close t o their historical norm relative to the broader market based on their price-to-book premium, or the difference in the P/B of dividend stocks to the S&P 500 index. Specifically, SDY shows a P/B of 2.96 while the S&P 500 has a 2.64 P/B. In contrast, the five-year average price-to-book premium relative to the S&P 500 is 1.08.