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Market Update

Are Dividend Stocks Overvalued?

Using Morningstar's key dividend indexes as platforms, we explore valuation of high-yielding versus high-quality dividend-payers.

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Investors are in hot pursuit of income in the equity market, and the trend is evident in the asset flows numbers. According to Morningstar's 2016 Strategic-Beta Landscape report, dividend-screened/weighted ETPs are the most popular flavor of rules-based passive globally. In the U.S., they represent 27% of strategic-beta assets; in Europe 43%. Several actively managed U.S. equity funds with "dividend" in their names have bucked the trend toward passive, attracting significant flows.

But flows are often a contrarian indicator. Investors pile in after an asset class has run up, only to be disappointed. This leads to a persistent gap between total returns and money-weighted return as seen in Morningstar's Investor Returns data. So now is a good time to carefully consider the attractiveness of equity-income strategies. History teaches us that if valuations are lofty, future expected returns are likely to be modest. Are we, as some have said, in the midst of a dividend bubble?

Dan Lefkovitz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.