These Dividend Stocks Can Deliver a False Sense of Security

You might have caught the recent Barron's cover that read "Dow 16,000!"

It was hard to miss – the cover pictured a wide-grinning bull bouncing on a pogo stick.

The issue outlined why large fund managers were bullish about the next year, with 74% of those polled saying the market was headed higher.

That is the single highest reading ever in the poll, indicating wild enthusiasm among those controlling the largest pots of money.

The major reason driving stock market euphoria is the zero interest rate policy (ZIRP) of the U.S. Federal Reserve.

ZIRP has made the stock market the only game in town. It seems they like stocks because there is nothing else to do with the money.

In fact, the inability to get yield from other sources has also pushed central banks into stocks. According to a recent Bloomberg News report, about 24% of central bankers say they own stocks or plan to buy in the near future. The Bank of Japan plans on doubling its position in equities, and both the Swiss and Czech national banks boosted stock holdings to at least 10% of reserves.

Buying stocks in search of yield has been a prevailing view among individual investors as well for much of the past two years.

In particular the quest for yield among individual investors has led them to seek out dividend stocks, especially dividend-paying blue chip stocks, without regard for fundamentals.

Now as stock prices have risen and sentiment is overly bullish, many of these stocks are not particularly cheap on fundamentals and may be vulnerable if the big money managers become bearish and start selling. Despite their recent high bullish readings, these money managers have proven to be a very fickle group.

They could also turn bearish because even though they're optimistic about the markets, these money managers believe that the economy over the next decade will grow at the same anemic rate as it has over the past few years.

Most of them think the threat of inflation will be greater in the future than it is now. One of the greatest threats to the stock market is the specter of rising interest rates and more than 90% of managers surveyed think Treasuries are overvalued and should decline.

Most of them also think it will take more than five years for the European Union to resolve its financial crisis, which could also pose a threat to stock prices.

All this is why investors should be carefully going through their portfolios and paying especially close attention to blue chip holdings. The dividend yield and well-known nature of these stocks can easily lead to a false sense of security.

Many of them are starting to show fundamental deterioration. As the recession lessens and the economy began to grow a little some of these companies had decent sales and earnings growth that is now slowing and the stock prices could be vulnerable to a sustained and possible substantial decline.

There are several signs of slowing growth that investors should be aware of that can serve as an indication it is time to sell one of your dividend-paying blue chip stocks.

We outlined a few you should watch out for.

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