Good read here from Alliance Bernstein on high yield stocks:
“Investors have been flocking to high-dividend-paying stocks, lured by their predictable, bondlike income and downside defenses. But investors may be getting more risk than they bargained for.
The widespread pursuit of safety in high-yielding stocks has driven up their valuations and increased market concentration in these stocks. It has also caused an alarming surge in their correlation to bonds, so investors may be getting a lot less diversification than they realize.
Let’s look at valuations first. High-yield stocks are as pricey as they’ve been since the early 1950s, trading at a modest premium to the market versus a long-term average discount of 20%. We don’t view this premium as exorbitant given the current market anxieties, but it does limit upside potential and makes these stocks more vulnerable than others if sentiment turns. Most of the high-priced dividend-paying stocks are in mature, slow-growth sectors such as consumer staples, telecom and utilities, which are likely to look less appealing than more economically sensitive stocks in a sustained economic recovery.”
Read the full piece here.