There's a new acronym gaining momentum in the investing world: FOBOR.
It stands for FOrced Buyers Of Risk. What it means essentially is that due to aggressive monetary policies by central banks, investors have basically been forced out of fixed income assets like bonds and into riskier assets like stocks.
Many of these FOBORs are institutional investors like pension funds that rely on steady income streams to meet their liabilities. And simply a sub-2% yield on a 10-year Treasury note isn't going to cut it. So they shift their money into high yielding - and riskier - assets.
Considering that the yield on the 10-year Treasury note is currently less than the dividend yield on the S&P 500, this move isn't surprising. Since 1962, this spread has averaged +3.54%, as you can see in the chart below:
The More Boring the Better
FOBORs are reluctant stock investors, so most prefer the lowest beta, most stable dividend stocks out there since they are used to the safety of bonds. This move has driven stock prices in many "boring" stocks to record highs.
Retail giant Wal-Mart (WMT - Analyst Report) is a great example of this. This low beta, stable dividend stock was stuck in a trading range for more than a decade. But suddenly last spring, the stock broke out and surged to new all-time highs:
But has this "reach for yield" created a bubble in dividend stocks?
Defensive Too Expensive?
Bubble might be too harsh of a word. But defensive stocks certainly look a little frothy here.
You can see in the chart below that the P/E ratios in the 'Consumer Staples' and 'Utilities' sectors are among the highest in the S&P index despite their low growth nature:
While low beta dividend stocks are becoming harder to find at a reasonable price, there are still some pockets of value out there.
3 Low Beta, Reasonably Priced Dividend Stocks
I ran a screen in Research Wizard that searched for the following criteria:
- Dividend yield greater than 2.5%
- Forward P/E ratio below 15
- Price to cash flow ratio below 10
- Beta less than 1
- A history of rising sales and EPS
- A history of rising dividends
- Zacks Rank of 3 (Hold) or better
Here are 3 of my favorite names from the list:
Rogers Communications (RCI - Analyst Report)
Dividend Yield: 3.7%
Forward P/E: 14x
Price/Cash Flow: 7x
Rogers Communications is a Canadian communications and media company engaged in the telecom and media businesses. The company operates in three segments: Wireless, Cable & Business Solutions, and Media. Rogers generates strong and stable cash flows which it has used to increase its dividend at a 12% compound annual growth rate over the last five years.
Kohl's (KSS - Analyst Report)
Dividend Yield: 2.7%
Forward P/E: 11x
Price/Cash Flow: 6x
Kohl's operates 1,155 department stores in 49 states. The company has delivered steady sales and earnings growth over the last decade and began paying a dividend in 2011. Kohl's also recently delivered a big first quarter earnings beat that should drive analysts' earnings estimates meaningfully higher.
Chevron (CVX - Analyst Report)
Dividend Yield: 3.3%
Forward P/E: 10x
Price/Cash Flow: 6x
Chevron is a global energy company primarily focused on the exploration and production of oil. Although the company is dependent on oil prices, which can be very volatile, Chevron has managed to increase its dividend at an 11% compound annual rate over the last 10 years and did not cut its dividend during the Great Recession.
The Bottom Line
Forced buyers of risk have driven valuations higher in many stable dividends stocks. But these three low beta stocks still offer strong yields at reasonable prices.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.
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