Some investors prefer steady stream of income from dividends over capital gains. Companies with high dividend yields are the best picks for them. In fact, many yield-seeking investors employ the popular Dogs of the Dow strategy, wherein 10 dividend-paying blue-chip stocks of the Dow Jones Industrial Average (DJIA) are added to the portfolio.
However, a similar strategy can be employed for S&P 500 stocks as well. Remember, the S&P 500 has had a great Bull Run in recent years and has even outperformed the dogs by 14% over the last 10 years.
As said, dividends are great instruments for ensuring steady income. However, a higher dividend yield also implies higher risk for the stocks. Investors would also need to be watchful to avoid income traps. Companies may promise high yield, but they should also have sufficient capital generating ability. So, we will consider the top-ranked S&P 500 stocks with highest yield to help investors pick the winners for 2015.
Run Up to 2015: S&P 500 Hits 53 Highs in 2014
The S&P 500 recorded 53 record highs in 2014 and gained 11.4%. The S&P 500 has gained 64% in the last three years. The gains this year have come despite international concerns, which were weathered by strength in the domestic economy.
Following a robust Bull Run in 2013, benchmarks began 2014 on a sour note. Emerging market concerns, China’s dismal economic data and finally the Fed taper dealt severe blows to the market in January. However, right after the dismal start, S&P 500 rebounded strongly in February with strong gains. S&P 500 continued its surge, tackling the Russia-Ukraine crisis.
However, the positive run was halted in July, when the S&P 500 declined 1.5%. Escalating geopolitical tensions including the ones in Gaza, Ukraine, Malaysian Airlines passenger jet being shot down, and the Eurozone banking system unnerved investors. The rebound came again in August, but the S&P 500 ended with losses again in September, largely due to disappointing data from China and the Eurozone.
The S&P has since then been on the winning side. The Ebola scare and a slump in oil prices caused trouble for the benchmark til mid-October. On Oct 15, S&P 500 was inches away from entering a correction. However, the bulls took hold of the market thereafter, negating talks of correction banking on strong third quarter earnings numbers.
Markets tackled international concerns banking on domestic strength. GDP shrunk 2.9% in the first quarter of 2014, the worst performance in five years. However, GDP increased by 4.6% in the second quarter and 5% in the third quarter. The economy also added a minimum of 200,000 jobs for 10 straight months in November. This is the longest stretch in more than 30 years. The unemployment rate remained at a six-year low of 5.8%.
An improvement in the employment situation led to the US Federal Reserve ending its third round of bond buying. Also through the year, investors kept a watch on what the Fed decides regarding the rate hike. In a recent statement, the Fed said that they would be “patient” before raising rates, and added that the overall outlook hadn’t much changed from their earlier assurances that rates would stay low for a “considerable time.” This statement boosted markets to their best gains in 2014. (Read: 5 Best Performing S&P 500 Stocks of 2014)
S&P Dividend Trend
High dividend yields also mean undervaluation of the stock. Dividend yield is inversely proportionate to stock price – a decrease in price leads to higher yields. So these high-yield stocks may not be the top performers in the benchmark.
On the other hand, the price drop that creates high yields also indicates a possible rebound. High dividend yields suggest that these stocks are in oversold territory and will rebound faster than any other stock when the business cycle changes. This would result in higher capital appreciation along with attractive yields.
Now looking at the S&P 500, reportedly 421 of the components pay some sort of dividend. Among these, 337 have hiked their dividend yield in the past year. Dividends paid per share (DPS) increased 11.3% to $37.99 for the 12-month period ended October.
This was the 15th straight quarter of double-digit DPS growth, according to FactSet. The average quarterly growth over these 15 quarters stands at 14.2%. Consumer Discretionary sector's DPS led the gains as it jumped 18.8%. It was followed by Financials, Telecom Services, Energy, Information Technology and Industrials, registering improvements of 17.6%, 15.5%, 14.6%, 13.6% and 12.2%, respectively.
If we look at the S&P 500 Dividend Aristocrats, which is a “measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years,” the 1-year return is a positive 12.1%. Meanwhile, the S&P 500 Dividend Points Index, which tracks the total dividends from the S&P 500 components, has a 1-year return of 7.4%.
5 High-Yielding S&P 500 Stocks to Buy
According to a report dated Dec 19, FactSet predicted dividend growth for 2015 to be at 8.3% for the S&P 500. This means the double-digit DPS quarterly increase may be halted. However, financial are expected to lead the dividend performance with forecasted growth of 14.8%. Consumer Discretionary sector may follow with dividend growth of 10.3%.
The US Federal Reserve is expected to raise rates this year, which may indirectly hit dividends and thus the low expectations. Nonetheless, some market experts are predicting another year of strong gains in 2015. So, banking on favorable Zacks Rank and highest dividend yields, the following 5 S&P 500 stocks may be good additions to an income investor’s portfolio.
Reynolds American Inc. (RAI) manufactures and sells cigarette and other tobacco products through its subsidiaries in the US. Among its subsidiaries, RJR Tobacco is a leading cigarette manufacturer, which operates mainly in the U.S. American Snuff is a leading smokeless tobacco product manufacturer in the U.S.
Reynolds American has a dividend yield of 4.2% and carries a Zacks Rank #2 (Buy). The company has been consistently paid higher dividends since 2010 on an annualized basis. From total dividends worth $1.84 paid in 2010, Reynolds American has paid total dividend of $2.68 in 2014. The stock gained 28.8% in 2014.
Consolidated Edison, Inc. (ED) is a diversified utility holding company with subsidiaries engaged in both regulated and unregulated businesses. ConEd’s regulated businesses operate through two subsidiaries Consolidated Edison Company of New York (CECONY) and Orange and Rockland Utilities (O&R).
Consolidated Edison has a dividend yield of 3.8% and carries a Zacks Rank #2 (Buy). The company has increased dividends for 40 consecutive years. It annualized dividend was $2.52 in 2014, up from $2.46 in 2013. However, though yields were higher in the first three quarters of 2014 – 4.7%, 4.6% and 4.5%, respectively. The stock gained 19.9% in 2014.
Darden Restaurants, Inc. (DRI) is one of the largest casual dining restaurant operators worldwide. The company has operations in the United States and Canada with a total of 1,504 restaurants as of Aug 24, 2014. Management returns much of its free cash to shareholders through share repurchases and dividends.
Darden Restaurants has a dividend yield of 3.77% and carries a Zacks Rank #2 (Buy). Total dividend paid in 2014 was $2.20. The stock gained 7.9% in 2014.
Kimco Realty Corp. (KIM) a retail real estate investment trust (REIT) along with its subsidiaries is one of the major owners and operators of neighborhood and community shopping centers in the U.S. Solid dividend payouts remain arguably the biggest attraction for REIT investors as the U.S. law requires these companies to distribute 90% of their annual taxable income in the form of dividends to shareholders.
Kimco Realty has a dividend yield of 3.77% and carries a Zacks Rank #2 (Buy). Total dividend paid in 2014 was 96 cents. The stock gained 24.9% in 2014.
Public Service Enterprise Group Inc. (PEG) is a diversified utility holding company. Its operations are mostly located in the Northeastern and Mid-Atlantic parts of the U.S. Public Service Enterprise principally operates through two key subsidiaries – PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G).
Public Service Enterprise Group has a dividend yield of 3.53% and carries a Zacks Rank #2 (Buy). Total dividend paid in 2014 was $1.48. The company, or its predecessor company, has paid dividends for 107 years consecutively. The 2.8% annual hike of dividends in 2014 marked the 10th increase in last 11 years.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment