High-yield dividend stocks may have entered a bubble, and clients and advisors should be aware.

That was the message Shane Bigelow, a director and principal at Bernstein Global Wealth Management, a subsidiary of AllianceBernstein, touted to a room of NYU journalists Monday in the firm’s headquarters in New York.

“Investors are attracted to high dividend stocks because of the income they are able to generate in their portfolios,” he said. “But because they are so attractive, especially in this low-yield environment, many of these stocks may be overpriced and as a result may underperform the market over time.”

With pressure rising as Congress continues to negotiate the fiscal cliff, the market has been on a roller-coaster ride since President Obama was reelected.

“It’s probably at the forefront of every U.S. investor’s mind at the moment,” Bigelow said. “There will most likely be changes to the specific terms, but the bigger question is what these changes will entail, and how they are going to affect the market.”

Meanwhile, too many investors are basing their investment decisions on current market sentiment without looking at the bigger picture, he said.

Flipping between graphs and charts of historical market sentiment during and after major financial crises like the 1980s savings and loans crisis, the dot-com bubble, and the more recent subprime mortgage crisis, Bigelow made the case that too many investors tend to pour money into stocks at the peak of a bubble, and pull it out only after it crashes.

“We’re in the middle of a least loved bull-market right now, with investors gripped with fear,” he said, pointing to a graph that depicted a shift of roughly $1 trillion of $16 trillion coming out of stocks into bonds this year. “History shows that that’s not the smartest way to invest your money.”

Instead, Bigelow suggested investors and advisors invest in value stocks, stocks that are cheap in terms of their price-to-book ratio, to take advantage of dampened market sentiment, largely created by the fiscal cliff.

“At the end of the dot-com bubble, we might not have picked all the right stocks,” he said.  “But we were in stocks, and that already gave us a directional advantage, which is to some extent why we are where we are today.”  

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