I recently read an article titled ” Are we Witnessing a Dividend Bubble?“. While catchy titles like Dividend Bubbles and comparisons to the Nifty Fifty from the 1970?s can attract readers, there is little substantive evidence to prove that we are in an actual dividend bubble. Back in 2008 I myself wrote an article where I predicted that record low interest rates might lead to a Dividend Bubble.
The Nifty Fifty was a group of one decision growth stocks, which money managers bought indiscriminately regardless of valuation. When the US economy entered a recession in 1973, the rosy earnings expectations for the high multiple Nifty Fifty turned gloomy. As a result, share prices fell sharply. The contraction was more severe for the Nifty Fifty stocks, many of which did not return to their highest stock price levels for many years.
Dividend stocks are a buy and hold for the long term type investment. Making an assumption about “dividend bubbles” based on relative outperformance in a period of less than one year does not sound convincing. While the Nifty Fifty were also considered a buy and hold type of stocks in the 1970?s, the major difference is that dividend stocks are actually undervalued. In addition, few investors actually appreciate the value that dividend stocks offer to investors. Bubbles are characterized by irrational exuberance and chasing of assets regardless of their underlying fundamentals. Given the fact that only few investors appear optimistic about dividend stocks, and that fundamentals appear sound, it is premature to talk about a bubble in dividend stocks.
