The Fed’s goal of incentivizing investors to go back into equities with its series of quantitative easings may be backfiring.
Investors are primarily choosing dividend-paying stocks and companies that are buying back shares. This means policy makers are forcing capital into income-producing assets instead of growth seeking as the Fed is hoping for.
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US companies spent $650 billion on share buybacks in 2011 and only $580 billion on capital spending. The sectors receiving the most capital were given the lowest stock valuations by investors.
Companies are reacting to investor demand
. Healthcare companies are cutting back on research to boost dividends. Telecommunications companies have the highest-paying dividends of any other sector.
Dividend funds have even replaced growth funds in emerging markets as the top-selling equity products.
If taxes on dividends are raised, however, the tide may shift back toward growth. Of course, all of that depends on whether a compromise is reached on the looming fiscal cliff.
Some analysts are already warning of a possible dividend bubble
, saying that dividend-paying stocks have become way overpriced because of investors’ hunger for income yield in an historically low interest rate environment.