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Youve heard about housing bubbles, commodity bubbles and the Internet bubble.

Are we in the midst of a dividend bubble?

After the big runup in dividend stocks over the past couple of years, a few people have started to throw around the b word. They argue that with bond yields at historic lows, income-starved investors have rushed recklessly into dividend stocks, pushing prices to dangerously high levels.

Some are even comparing it albeit loosely to the subprime bond crisis. Yikes!

Blue-chip dividend stocks are not subprime bonds. But theres an argument to make that, just as investors ran blindly into subprime bonds five years ago in search of yield, theyre running blindly, carelessly into dividend stocks today, Morgan Housel, a contributor to the Motley Fool investment website, wrote recently.

Its true that dividend stocks have become enormously popular with investors, and valuations in some cases may have become stretched. Price-to-earnings multiples for many classic dividend payers pipelines, utilities and real estate investment trusts, for example have jumped and yields have plunged to the lowest in years. Theres also been an explosion of dividend-oriented products particularly exchange-traded funds to meet the growing demand for income.

But its a gigantic leap to argue that we are therefore in a dividend bubble. Were not, and heres why.

First, lets define what a bubble is.

Most investment bubbles, or manias, share several characteristics. They are usually speculative in nature, meaning that investors buy with the expectation that they will be able to flip the asset for a large capital gain. Demand is often fuelled by leverage, which magnifies price increases, which in turn draws in more buyers.

As investors become increasingly euphoric, they ignore risks and throw traditional valuation methods out the window to justify the ascent in prices. There is often talk of a new era a feeling that prices will rise forever.

Read the rest here:
Dividend stocks are buoyant, but not bubbling