The Coca-Cola Company (KO), PepsiCo, Inc. (PEP): Are Dividend Investors Heading for a Slaughter?

But there’s a countervailing trend that could actually lead to less investment in bonds as rates rise. Bond funds have been extremely attractive as investments lately, because their prices have gone up as rates have fallen, producing lucrative total returns. Yet because prices of existing bonds fall when yields go up, returns will look worse for bond funds, making them look less attractive to many performance-chasing investors. Already, popular bond funds have made investors suffer capital losses. For instance, iShares Barclays 20+ Year Treasury ETF (NYSEMKT:TLT) having lost almost 10% since last July, even including the dividends that fund shareholders have received over that timeframe.

Waiting for the fall
Unfortunately, history suggests that even investors who arguably shouldn’t have as much exposure to dividend stocks will resist reducing their stock allocations until after the stock market starts to decline. Already, popular high-yielding stocks have seen big increases in their earnings multiples. Among consumer food and beverage stocks, for instance, both The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) have seen their P/E ratios climb significantly over the past couple of years, with multiples approaching 20 even amid the companies’ declining demand in the U.S. amid regulatory pressure to address obesity concerns from sugary soft drinks. When stock prices ignore fundamental challenges, it’s a reflection of how much demand there is for the stocks’ roughly 3% dividend yields.

Combined with the likelihood that investors will flee negative returns in bond funds and add even more money to dividend ETFs and similar income-producing stock investments, the bull market in dividend-paying stocks looks likely to continue for a while longer. The higher dividend stocks go from here, though, the more likely it will be that when the inevitable downturn comes, it will be more violent than most conservative investors are prepared to see.

The article Are Dividend Investors Heading for a Slaughter? originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo.

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