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Watch out for valuations when buying dividend stocks, experts warn

Is Wall Street addicted to dividends?

As investors have moved into dividend stocks in their search yield, investment pros warned Friday that they should always think about valuation.

For example, some integrated oil companies have "horrendous" valuations, trader Tim Seymour said in an interview with CNBC's "Power Lunch."

"We just went through a terrible second quarter in terms of EPS for these guys, and yet people are clinging on. And actually, perversely, oil companies are protecting their dividends at the expense of investing in Capex and production," the managing partner at Triogem Asset Management said.

"You could make an argument that the dividend chase is something that is actually holding back even oil production."

Nicholas Roberts | AFP | Getty Images

companies are reportedly giving shareholders more of their profits than any time since the financial crisis.

According to The Wall Street Journal, they are paying out almost 38 percent of their net income to shareholders for the past 12 months. What's more, 44 S&P 500 companies paid an annual dividend in the second quarter that surpassed their latest 12 months of income, the paper reported.

Simeon Hyman, head of investment strategy at ProShares Advisors, said the key for investors is to look for companies that have the longest track record of growing dividends.

"The risk is in stretching for yield," he told "Power Lunch."

ProShares S&P 500 Dividend Aristocrats ETF are composed of companies that have at least 25 consecutive years of dividend growth, he said.

"They may not be the highest yield, but are incredibly consistent and supported by fundamentals," said Hyman. "We have been in this earnings recession, and that's one of the things that's driving those payout ratios up."