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The Fed’s zero interest policy is creating another misallocation of capital.

Money market accounts are paying less than 1%. Bonds are paying less than 2%. As a result, investors are desperate for yield.

They’ve been flocking into income-producing stocks at the fastest pace in decades. This frenzy has made many high-dividend stocks really expensive. This is a trap you should avoid.

The chart below from Empirical Research compares the P/E (price-to-earnings) ratio of the highest dividend payers to that of the S&P 500 index. When the ratio is above one, it indicates high dividend-paying stocks are trading at a valuation premium to the broad market.

See larger image

As you can see, high dividend-paying stocks are trading at a record valuation premium.

REITs (real estate investment trusts) and MLPs (master limited partnerships) offer a good example. They’re very popular among income investors because they offer a relatively high yield. But you have to be careful. Some of these stocks have become way too expensive.

For example, Simon Property Group (SPG), a popular REIT, is trading at a P/E ratio of 30. And Kinder Morgan Energy Partners, a popular MLP, is trading at a P/E ratio of 43. Meanwhile, the S&P 500 index is trading at a P/E ratio of 15.4.

This will not end well. You have to be very selective when choosing dividend stocks. That’s why I’ve compiled a list of high-dividend stocks that are still trading at a reasonable price. If you would like to know more about it, click here.

Regards,


Evaldo Albuquerque
Editor, Pure Income

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