Are Dividend Stocks A Safe Investment?

Submitted by Joel Laceda of BehindWallStreet as part of our contributors program.

The stock market crash from 2008 changed investor confidence in the stock market and now people want investments that are rock solid. Investors are more concerned with protecting their money and the low interest rate environment make safer investments like GICs and the Bond market unappealing.

So where does the average investor put their money in this low yielding market environment?

Many investors have flocked towards Dividend Stocks because they perceive them to be safe investments and they offer higher yields than the bond and cash markets. Dividend stocks offer the potential for capital appreciation and tax preferential dividend payments.

As a result, Dividend stocks are in high demand. There use to be a day when Dividend Stocks were comprised of stable and boring Blue Chip, Insurance, Financial, Utility, Consumer Staples, Energy corporations that no one would talk about.

Now these Blue Chip stocks have broken out of there stable price patterns into the world of the growth stocks and the industry can’t stop talking about them.

Is the current craze about Dividend Stocks a good thing?

Have Dividend stocks become the latest fad, the hot potato, the sector where all the money is flowing?

The sector in-play eventually becomes the most volatile and the fast appreciation is always followed by a sharp sell-off. These moves take time and when we start talking about stocks we normally don’t talk about, it shows a change in sentiment in those stocks. That is the first warning signal.

BehindWallStreet.com is warning you that the Dividend Stock Sector is flashing the signs of the typical bubble. We are simply giving you a heads up to warn you that the price move from the 2009 low to the 2013 is unsustainable.

Remember the housing bubble, the tech bubble, the silver and gold, well all those players who fueled those bubbles have shown up in the Dividend Sector. How funny is that, no one would suspect that a bubble forming in the most stable dividend paying stocks in the world.

Let’s take a look at the Weekly XLU (Utilities Select Sector SPDR), does it remind you of the Cliff Hanger game from the Price is Right. Go ahead and hum the song in your head, it is very catchy after all.

The average stock market return was approximately 9.4% from 1899 – 2012, you can see that XLU is running on steroids.

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If you know anyone who thinks that Dividend Stocks are safe, do them a favor and have them read this article on BehindWallStreet.com.