Are income stocks in a bubble?
Page 1 of 2
Christine St Anne is Morningstar's online editor.
Subdued growth and falling interest rates have sustained the demand for high-dividend stocks, particularly from yield-hungry retirees. Australia's taxation system has made these high-dividend-paying companies even more attractive through franking credits.
With the chase for yield, share prices for some of these stocks have been boosted. The question now is whether or not a bubble may be growing in income stocks.
Ibbotson Associates head of equities and property Greg Clarke says price pressure has emerged in the defensive sector, a sector known for its relatively higher dividends.
"This has pushed valuations to a certain point. There has been dispersion [in price] between the market sectors, with defensive stocks like REITs [real estate investment trusts], healthcare, consumer staples and infrastructure stocks doing extremely well," Clarke says.
"Some of these stocks are fully valued and some healthcare stocks are stretched," he says.
Utilities are also another sector where valuations could be stretched, particularly as some companies are finding it difficult to grow their earnings, according to Clarke.
Despite the higher share prices for some of these companies, Clarke says there is no evidence of a bubble. However, forward projections relative to other sectors will be challenged.
For Russell Investments portfolio manager Scott Bennett any possible bubble will be restricted to income stocks that are also high-quality, blue-chip names.
"These companies have good yield but also stable earnings and a good profit outlook," he says.
High-dividend exchange-traded funds (ETFs) also did well.
According to Morningstar's latest ETF report, the Russell High Dividend Australian Shares (RDV), the SPDR MSCI Australia Select High Dividend Yield (SYI) and the Vanguard Australian Shares High Yield (VHY) were all up at least 5.7 per cent over the month to 31 July 2012.
Telco in a bubble?
Of all the income stocks, Telstra is the one with the bubble, according to WAM Capital chair Geoff Wilson.
Australia's beloved income stock has enjoyed a growing share price hike of late. In late July, the company's share price was pushed to new highs around $4. When its profit announcement for fiscal 2012 was released, the share price ended the day at $3.88. The share price is currently hovering around $3.70.
"The share price [of Telstra] has been driven by investors looking for the security of a fully franked dividend," Wilson says.
Wilson says investors looking for income have been investing in a company like Telstra without fully understanding the risks.