While the market has enjoyed impressive gains ever since it hit a multi year low in March 2009, investors are beginning to get nervous about valuation. If
valuation is too high, chances are that investors are overpaying for stocks purchased, which could lead to lower performance over time.
Luckily however, the rally off of March lows has been lead by speculative names from the financial sector. Most of the high quality names that dividend investors follow, such as Johnson & Johnson (JNJ) or Pepsi Cola (PEP), have mainly followed the market higher in its ascend. If we were truly in a new bull market however, then we should expect that most investors would switch to quality blue chip companies. Another positive part is that stock prices are still lower, in comparison to their levels in September 2008.
While entry price does matter, defensive dividend investors should also look at the dividend coverage and the company's ability to grow the distributions over time. Only after these two prerequisites are met, should investors begin evaluating companies with at least a decade long histories of dividend increases on the basis of valuation.
A minimum requirement for yield should also provide an adequate margin of safety in dividend income to investors in the event that the timing of the purchase was not correct in the short term. Even if the stock price stays below the entry price of dividend investors for a prolonged period of time, they would still be in a position to get paid to hold the stock. Enterprising dividend investors might even be able to re-invest distributions at lower prices.
In addition to that, if the company manages to keep raising distributions even during economic downturns, then it should also be able to increase dividends during economic rebounds. Thus, one could reasonably expect that share prices would increase during a bull market.
I have listed several dividend stocks, which are not overstretched. They are mostly dividend achievers and aristocrats.
