The Dividend Challenge

I was giving a talk the other week in Chicago and one audience member asked me what was my biggest concern in the markets.  I responded that it was high yield stocks in the US.  I am finishing up a longer piece that should be out next week, but below is a simple exercise for those that want a sneak peek.

1.  Goto Morningstar and input a ticker for a high yield stock ETF or fund, let’s say VIG since it’s the biggest:

http://etfdb.com/type/investment-style/dividend-etfs/

http://portfolios.morningstar.com/fund/summary?t=VIG

2.  Scroll down and take a look at the valuation metrics.

3.  Compare to the overall market.

4.  Be surprised.

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.