Dividend Stocks Lag as Investors Load Up on Risk

BOSTON (TheStreet Ratings) -- The Dividend Stars portfolio rose 2.85% in February on a total return basis, underperforming the benchmark S&P 500 Index over the same period by 0.53 percentage point.

Since being launched Nov. 10, the Dividend Stars portfolio has returned 9.82% versus 10.94% for the S&P 500, a lag of 112 basis points. So far in 2012, the portfolio is trailing the S&P 500 by 2.1 percentage points. (Please note: The benchmark will be changed to the Dow Jones U.S. Dividend 100 Index beginning in March.) The current portfolio offers an average dividend yield of 2.71% versus 2.0% for the S&P 500.

Since the start of 2012, investors have turned away from defensive sectors and dividend-paying stocks, and have assumed more risk. According to Merrill Lynch research, low-quality stocks (those with a C&D quality ranking) have returned 20.4% this year, while stocks with a higher-quality rating (A or A+) have returned only 5.7%.

As is often the case during periods of increased market confidence, investors are bidding up companies with greater-than-average leverage, are more volatile and cyclical in nature. The best-performing sectors in the month were technology, financials and energy (all cyclical sectors), while the best-performing factors in the month were low-price-to-book and high beta. Deeper-value names that had been left for dead are now coming back to life as optimism abounds and investors seek higher growth names with higher return potential. Translation: The risk trade is most certainly on.

It's no surprise that dividend-paying stocks have been brushed aside in favor of lower-quality, higher-beta names. Based on the aforementioned Merrill Lynch research, non-yielding stocks significantly outperformed in the month; stocks with zero yields returned 3.53% versus stocks with a yield of 3.16% or higher, which returned minus 1.49%. The trend this year is even more significant as zero yielders have returned 6.82%, while the highest-yielding stocks have returned minus 6.7%.