“With investors adjusting to the prospect of rising interest rates, high-yielding stocks sat out the latest leg of the market’s rally. S&P 500 stocks averaged a 6% total return over the last three months, while those with dividend yields above 3.5% averaged a loss of 2%.
“But, on average, the median 12-month return of stocks with dividend yields in the top one-fifth of the S&P 500 Index has exceeded the median for all S&P 500 stocks by 1.8% since 1992. In the past five years, dividend yield has done even better, outperforming by an average of 2.7%. Relative to the median S&P 500 stock, dividend yield ranks as the sixth-most-effective factor in Quadrix in the past five years and ninth since 1992. But returns of the top yielders were volatile compared to those of most other Quadrix factors. A high-yield strategy tends to steer investors toward cheap companies with shareholder-friendly policies. It can also push investors into the dregs of the stock market. Sometimes a prized yield becomes an unwieldy albatross, with the dividend draining a company of the cash needed to reinvest in itself to sustain operating momentum, or to shore up the business during difficult periods.
“For that reason, we seek out companies committed to growing the dividend. Consider, for instance, the transformation under way in technology. The average technology stock in the S&P 500 yields 1.4%, more than twice its the average since 1994. Nearly half of dividend payers in the technology sector boast yields more than half a percentage point above their three-year averages.
“Dividend yields for the S&P 500 are slightly below historical norms. The average stock in the S&P 500 yields 1.8%, down from its 2.0% average since the end of 1994. But income opportunities still exist. Today, 191 of the 415 dividend payers in the S&P 500 pay yields above their three-year averages. In addition to technology, the consumer-discretionary and financial sectors also feature a preponderance of stocks with yields above their three-year averages—even though dividend payers in these two sectors average one-year total returns of 43% and 41%, highest among sectors (see chart below).”
Richard J. Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, 8/12/13
