Which Sectors Are Best for Dividend Investors?
January 20, 2015 3:51 PM
Which Sectors Are Best for Dividend Investors?
Where should advisors look for dividends in the stock market? The traditional answer has been the utilities sector, but that isn't suitable for all clients.
Here's a closer look at what S&P 500 sectors yield, how dividends have been growing (or shrinking) in relation to the overall market, and what percentage of stocks in the sector provide a dividend. For comparison, at the end of 2014, the S&P 500 yielded 2% and 84% of its stocks paid a dividend.
The easiest way to buy sectors of the S&P 500 is through the Select Sector SPDRs ETFs. Note, however, that while there are 10 sectors, but only nine ETFs in the set. The reason: At six stocks, the telecommunications services sector is too small to be a portfolio unto itself; it was merged with the IT sector to form the Technology Select Sector SPDR (XLK).
Page through the slides to see a statistical array of dividend information about each of the 10 sectors of the S&P 500, along with some factors to consider when evaluating these investments -- or click here to see the content as a single-page document. -- Joseph Lisanti
All data from S&P Dow Jones Indices; data is as of Dec. 31, 2014.
Read more: 10 Highest-Yielding S&P 500 Stocks
Photo: iStock
Here's a closer look at what S&P 500 sectors yield, how dividends have been growing (or shrinking) in relation to the overall market, and what percentage of stocks in the sector provide a dividend. For comparison, at the end of 2014, the S&P 500 yielded 2% and 84% of its stocks paid a dividend.
The easiest way to buy sectors of the S&P 500 is through the Select Sector SPDRs ETFs. Note, however, that while there are 10 sectors, but only nine ETFs in the set. The reason: At six stocks, the telecommunications services sector is too small to be a portfolio unto itself; it was merged with the IT sector to form the Technology Select Sector SPDR (XLK).
Page through the slides to see a statistical array of dividend information about each of the 10 sectors of the S&P 500, along with some factors to consider when evaluating these investments -- or click here to see the content as a single-page document. -- Joseph Lisanti
All data from S&P Dow Jones Indices; data is as of Dec. 31, 2014.
Read more: 10 Highest-Yielding S&P 500 Stocks
Photo: iStock
Telecommunications Services
The smallest sector in the S&P 500 index, telecom doesn't even have its own ETF. But its rich yield helps offset the low yield of the tech sector, with which it is paired in XLK. The surge in wireless communications is providing significant cash flow for the top two players in the sector. That should aid dividend growth for in the years ahead.
Utilities
Utilities are the dividend champs when it comes to uniformity: All of the 30 utilities in the S&P 500 index pay a dividend. As of the end of 2014, the sector's yield was 3.38%, second only to the telecom group's 5.07% yield. Only 83% of telecommunications services stocks in the index paid a dividend, but that figure is misleading, since the sector consists of a mere six stocks. Utilities and telecom each provide less than 6% of the total S&P 500 dividend.
These traditional income investments posted the best gains of any S&P 500 sector in 2014, up more than 24% (close to 29% with dividends). If the Fed raises rates later this year, however, these stocks could take a hit. Another unknown: how the EPA's new carbon rules will affect the sector. The yield is above average, but the risk may be too.
These traditional income investments posted the best gains of any S&P 500 sector in 2014, up more than 24% (close to 29% with dividends). If the Fed raises rates later this year, however, these stocks could take a hit. Another unknown: how the EPA's new carbon rules will affect the sector. The yield is above average, but the risk may be too.
Energy
A volatile sector that includes some stellar dividend payers, energy has sold off sharply in recent months as the oil price declined. In 2014, two stocks in the group decreased dividends, but 37 increased and one initiated a dividend. If oil prices continue to slide, more dividend cuts and capital losses may lie ahead this year. But long-term investors may pick up some bargains with attractive yields.
Consumer Staples
This group is the go-to sector when the economy is slack. It sports the fourth-highest yield among the 10 sectors. And 34 of the 38 companies in the group that pay shareholders raised their dividend last year.
The sector's 10-year average contribution to the index dividend is high, mostly because payments held up during the financial crisis.
The sector's 10-year average contribution to the index dividend is high, mostly because payments held up during the financial crisis.
Materials
This sector provides the smallest portion of the S&P 500's total dividend. Yield is slightly higher than the market's, but the highly cyclical nature of the stocks in the materials group makes the sector an unlikely choice for income seekers.
Industrials
Years of belt-tightening in response to foreign competition left this sector in fairly good financial shape. The group has an above-market yield and 94% of its stocks pay a dividend. The percentage of dividends in the index contributed by industrials has been fairly consistent over the past decade. Assuming the economy doesn't fall off a cliff, investors should continue to be rewarded by steady payments.
Financials
The financials have come roaring back in the dividend sphere. Five years ago, they accounted for a little more than 9% of the index's dividend; that number is now 14.67%. And 94% of the stocks in the sector now pay a dividend.
Last year, the financials sector of the S&P 500 had 80 positive dividend actions (increases, initiations and resumptions) and only two decreases. That's a big change from 2009 when the sector accounted for a large chunk of the index's 68 dividend decreases.
In the near term, financials unlikely to hit their 2004 level of 29% of the S&P's dividend, but they could soon match their 10-year average. Even so, there are worries that the banks have not abandoned the practices that got them into trouble in the first place.
Last year, the financials sector of the S&P 500 had 80 positive dividend actions (increases, initiations and resumptions) and only two decreases. That's a big change from 2009 when the sector accounted for a large chunk of the index's 68 dividend decreases.
In the near term, financials unlikely to hit their 2004 level of 29% of the S&P's dividend, but they could soon match their 10-year average. Even so, there are worries that the banks have not abandoned the practices that got them into trouble in the first place.
Health Care
Not too many years ago, Big Pharma was a cash cow with patent-protected blockbuster drugs. Today, many of those patents have expired and the pipeline isn't delivering as many hits. Newer drug and biotech companies tend to pay less or not pay at all. As a result, the sector has a below-average yield and the smallest percentage of dividend payers in the index. That's not likely to change soon.
Information Technology
The biggest contributor to the index's aggregate dividend is the information technology sector. It provides 14.93% of the S&P 500's dividend, up from 5.14% a decade ago.
Investors looking ahead for retirement income a decade from now may benefit from continued dividend growth in technology. Yet for now, the sector yields only 1.52% and just 69% of its stocks pay a dividend.
Investors looking ahead for retirement income a decade from now may benefit from continued dividend growth in technology. Yet for now, the sector yields only 1.52% and just 69% of its stocks pay a dividend.
Consumer Discretionary
Although stocks in this sector are paying better than they have historically, only three-quarters of the discretionary stocks provide a dividend for shareholders. The sector's yield is lowest of all at only 1.47%. And, because their goods are postponable purchases, companies in this sector suffer when the economy slows.
