Dividend-paying stocks in the S&P 500 Index (SPX), ignored by many investors who chased growth, returned 13% in the 12 months ended Sept. 29, compared to 9.3% for companies that do not pay dividends, Barron's reports. Over the past three years, the average annual returns for these two groups of stocks were 9.8% and 7.1%, respectively, per Barron's. But many investors now may be overpaying for dividend yield, while ignoring the potential for future dividends from growth companies, according to Jim Tierney, chief investment officer of concentrated U.S. growth at Alliance Bernstein Holding LP (AB).

Many consumer staples and utility stocks that pay rich dividends now look very expensive to Barron's. One example is global soft drink giant Coca-Cola Co. (KO). Among utilities, Centerpoint Energy Inc. (CNP), Sempra Energy (SRE), Consolidated Edison Inc. (ED), Avangrid Inc. (AGR) and Ameren Corp. (AEE) are a few of those that look pricey based on analysis by Investopedia. (For more, see also: Top 5 Monthly Dividend Stocks for 2017.)

Growth Fizzling Out

Coca-Cola shares recently yielded 3.2%, well above the 2% average for the S&P 500, but the company has delivered microscopic earnings growth. Analysts expect the company to post EPS of $1.98 next year, versus $1.92 in 2011, a cumulative increase of just 3% over seven years, per Barron's. Moreover, Coca-Cola's recent forward P/E ratio of 23.4 compares unfavorably to growth powerhouses Alphabet Inc. (GOOGL), the parent of Google, and Facebook Inc. (FB), whose respective multiples are 25.1 and 26.9, per Barron's. Neither tech giant pays a dividend right now, but both are generating mountains of cash and may become dividend payers as they mature and opportunities for profitable reinvestment of that huge cash flow diminish.

Overpowered Multiples

Utility stocks are a traditional safe haven for conservative, risk-averse investors. With an average dividend yield of 3.4%, large utilities have seen their prices bid up by income-oriented investors, per Barron's. As a result, bargains within this sector are becoming harder to find. "They are pricey on many metrics," as David Katz, chief investment officer of Matrix Asset Advisors, told Barron's. Indeed, a widely-followed ETF tracking the sector, the Utilities Select Sector SPDR (XLU), had a recent forward P/E of 18.1, per data from FactSet Research Systems Inc. cited by Barron's. (For more, see also: 3 Dividend Stocks That Outperform the Big Techs.)

In fact, there currently are 15 utility stocks that combine high dividend yields with high forward P/Es and low average annual EPS growth over the past five years, based on a screening tool from Fidelity Investments. For the five utilities listed above, these statistics are, per Fidelity: Centerpoint, 3.62% yield, 20.8 forward P/E, -11.09% five-year average annual EPS growth; Sempra, 2.88%, 20.5, -0.58%; Con Edison, 3.30%, 19.7, 2.91%; Avangrid, 3.59%, 20.2, 3.96%; and Ameren, 3.00%, 20.2, 4.51%.

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