Risk Level of Dividend-Paying Stocks
There is a perception that dividend-paying stocks are safer than the market as a whole; if stocks suffer a large loss, dividend payers will drop less. However, the 100 highest dividend-paying stocks in the Russell 1000 Index have a beta of 0.96, making their market-related risk almost the same as the S&P 500 (which always has a beta of 1.0).
With this presumption of increased safety by going into dividend-paying stocks comes a trade-off often not considered: swapping one risk for another. For example, seeking higher dividends may mean a much higher concentration in just a few sectors. Telecom (21 P/E), utilities (17 P/E), and consumer staples (15 P/E) are considered “defensive sectors.” But these three sectors have P/E ratios higher than the S&P 500’s (source: 12-month trailing P/Es, as reported by FactSet in September 2012).
Consider another sector: food, beverage, and tobacco companies. This group had a trailing P/E of 18.7 as of mid-September 2012 (vs. 14.5 for S&P 500). Yet some of the companies in this group have a P/E as high as 32.