Sell these 3 overvalued dividend stocks now

Tom Roberts

Wall Street would like us to believe that a 3% dividend is a good yield on your money that competes between bonds and stocks.

Do you know how many 3%-paying big name dividend stocks are big-time losers?

A lot!

The S&P 500 dividend yield is just 1.88% right now. That’s even less than bonds!

And don’t think cherry-picking companies will help. Big firms like Coca-Cola (NYSE: KO) pay just 2.94% … Procter & Gamble (NYSE: PG) just 2.48% … and Disney (NYSE: DIS) a miserly 1.30%.

So you’re doing very well to get any dividend over 3% in a quality stock.

The only upside is that good dividend stocks with strong businesses usually do well in an inflationary environment. They’re more or less inflation proof.

But there not exactly “crash-proof”, are they? If the market does collapse during another global financial crisis, companies watching their business evaporate before their eyes are not going to be feeling generous about dividends.

They’ll be thinking about survival, not profit distributions. Survival means lying and cheating while begging for government handouts all over again, just like 2008.

Those handouts will get paid out of your tax dollars too. (Doesn’t that get you angry? It just adds insult to injury as your retirement fund goes up in smoke.)

Get out while you can, with most dividend stocks trading at peak value.

Here are 3 overvalued dividend stocks to sell now:


McCormick & Company (NYSE: MKC)

The packaged food company is a great example of the bubble in dividend stocks. While there’s some justification for paying a high price for consistent cash flow, does it really make sense to pay 28 times 2020 estimated earnings?

Not really, especially when you consider that the company expects to grow profits in the single digits.

What happens to the valuation when yield seekers go elsewhere? Those that espouse dividend stocks fail to answer that question.

When an investment theme gets overdone, basic principles like valuation fall by the wayside; ultimately, the market proves that valuation does matter.

Sell McCormick before the market figures that out.


Kimberly Clark (NYSE: KMB)

From an investment perspective, there’s nothing sexy about Kimberly.

Typically, the market hands out premium valuations when there are fast-growing profits. That’s not the case with Kimberly Clark.

Analysts expect the company to grow profits by only 5% from the current year to the next. At current prices, shares trade for a very healthy 19 times 2020 estimated earnings.

The reason for the premium is the dividend. Kimberly Clark pays out more than 4% per annum. With interest rates so low, that’s attractive return. If there is profit growth on top of that, you might have a meaningful combined return.

That argument fails when the valuation is so high. Stock value falls from current levels as macro rates rise. This is the risk investors face, at current prices.

That 4% dividend might not look so attractive now. Add in the strong dollar risk it faces, and you have all the reason you need to break up with Kim.


Johnson & Johnson (NYSE: JNJ)

Johnson & Johnson is uniquely positioned to participate in the growth due to expansion of healthcare needs. Where, then, is the growth?

Analysts expect J&J profits to grow by only 6% from this year to the next. That’s horrible, considering the aging demographic. Growth should be much higher. If it were, one could justify the 15 times 2020 estimated earnings valuation on the stock today.

Buyers are attracted Johnson & Johnson’s almost 3% dividend. It’s that simple.

When rates go up in a meaningful way, an overvalued dividend stock like JNJ can be dead money.

Management got a free pass from dividend investors. When those investors leave, the picture will become clear.

‘Since a recent high in stock price in June, JNJ has been in a downward slide that wasn’t helped by the $572 million settlement from the opioid case in Oklahoma.

The stock could be worth substantially less (I’m talking 20-30%) than current prices. The trigger: rising rates.

Get out before they get too high.

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