by   |   April 29, 2014   |   on ,

Why You Should Sell These Dividend Gainers Now

I am an unabashed contrarian.

Over the last 25 years of being in this business, buying stocks that others don’t want and selling those that others are buying en masse has served me very well.

In fact, doing so is the one and only sure-fire way to beat the market.

Where are the contrarian opportunities today?

The answer is dividend stocks.

Over the last decade the gains in dividend stocks has been nothing short of stunning. While the rest of the market has essentially spun its wheels moving sideways, dividend stock returns have exploded higher.

That return may all be well and good, but it should also be eye-opening from a contrarian standpoint.

In particular, in the years since the financial crisis resulted in fixed-income rates going to essentially zero, yield-hungry dividend investors have pushed valuations to extreme levels.

It is a perfect setup for a contrarian play to sell dividend stocks today — whether to lock in profits or to capture returns from a compression in valuations that is sure to come as interest rates begin to rise.

One of the dividend stock gainers over the last decade is Stepan Co. (NYSE: STP). The specialty chemical company has returned nearly 600% over the last 10 years.

Investors have been attracted to Stepan for its defensive nature more so than the just-over-1% dividend yield. Nonetheless they have bid up shares to the point of Stepan trading for more than 15 times 2014 estimated earnings.

Profit growth has been solid in the double digits, but historically the chemical industry can be expected to grow by single digits.

Over the last year Stepan has missed earnings estimates by a wide margin and forward estimates are being slashed.

The transition to single-digit profit growth may mean now a perfect time to sell this stock.

Another big dividend gainer in the last decade is VF Corp. (NYSE: VFC). The apparel company increased in value by 550% over the last 10 years.

Investors have been attracted to VF by a near-2% dividend yield and steady profit growth.

But a funny thing happens to these boring dividend stocks as investors buy and buy and buy: the valuation gets out of whack with reality.

That is the case with VF Corp. Analysts expect the company to grow profits by 10% in 2014 and yet shares trade for nearly 20 times 2014 estimated earnings.

That is a wide disconnect that you might find in explosive growth technology stocks, not dividend stocks.

The current landscape for dividend stocks is dotted with such disparity in valuations relative to profit growth. It simply makes no sense.

It is exactly then — when things don’t make sense — that your contrarian radar should be flashing brightly.

I can’t tell you when dividend stocks are going to compress in value, but I can tell you that over time it will happen.

It always does.