As a dividend growth investor, you could narrow the universe of stocks you willing to consider for your investment to dividend stocks by excluding the overvalued ones. We will zoom-in on and discuss 10 overvalued Dividend Aristocrats, their valuation, dividend yield, and performance.
Determining overvalued dividend stocks
For selecting the top-10, we use the theory that for stable business dividend stocks, like the dividend aristocrats, their dividend yields tend to return to the historical average over time. In this case, a dividend stock is overvalued when the current yield is higher than the 5-year dividend yield average. In general, there could be two reasons for a below-average yield: the stock price is up, and/or the dividend has increased minimally.
We use a “Dividend Channel” as a visualization tool. The chart below shows how AT&T is how the stock is moving within a channel. As parameters, we used a dividend yield of 4% (top) and 7% (bottom) and the 5-year average yield. For example, a low share price, like in early 2019, results in a high dividend yield. Please note that the yearly dividend increases cause the channel boundaries to rise as well.
Top-10 most overvalued Dividend Aristocrats
So, here the list of Dividend Aristocrats as of May 22, with the highest percentage below the average five-year historical yield. The table includes the current dividend yield and also the potential annual extra return to get back to this average valuation. Last but not least, the year-to-date share price performance is also a component to take into consideration.
Several overvalued dividend aristocrats stock prices are up year-to-date, which is a strong performance given the corona-crisis. If you have concerns about the dividend please include some of the dividend safety metrics as well in your assessment.