Income Stocks With Momentum

12/14/2015


Income and fast-rising stocks don't always go together. But over the last three months, dividend-payers in the S&P 500 Index have averaged 3.0% total returns, topping the 0.3% managed by nonpayers.

Don't fall for the crutch argument that dividend stocks should deliver higher returns simply because of their dividends. Nonpayers frequently outperform dividend-payers over a few months or years, even taking dividends into account. In fact, over the last 12 months, nonpayers in the S&P 500 averaged returns of 3.7%, versus a decline of 1.1% for dividend stocks. Still, dividend stocks have outperformed lately, and there's something to be said for price momentum.

While the Forecasts has long counseled investors not to focus overmuch on yield or categorically avoid stocks that don't pay dividends, today's market features a number of excellent opportunities for income. The S&P 500's trailing dividend yield of 2.2% in the September quarter is the highest in more than eight years. The index's dividend payments reached $376 billion in the year ended September — a record high and nearly twice the level from a decade ago.

While super-high yields are hard to come by, plenty of high-quality stocks pay solid dividends. In the table below, we list 11 stocks that top their sector average in yield, as well as returns. Three are reviewed in the following paragraphs.

Comcast ($59; CMCSa) has returned 1.5% over the last six months and 6.0% over the last 12 months. In contrast, the typical consumer-discretionary stock has fallen nearly 5% over the last six months and returned 2.2% over the last year. Credit much of Comcast's strength to its uncanny ability to deliver growth despite the obvious headwinds facing pay-TV providers — rising content costs and stiffening competition from rivals able to offer a wide range of programming over the internet.

In recent quarters, Comcast has managed to control the erosion of its video customers while finding growth in other areas. In the nine months ended September, Comcast lost a net 48,000 video subscribers but gained 320,000 internet customers. In addition, the NBCUniversal unit managed nearly 12% revenue growth. Comcast is a Focus List Buy and a Long-Term Buy.


Foot Locker ($66; FL) shares have declined 6% over the last three months, hurt by lackluster overall retail sales and, in particular, weakness at rival Finish Line ($16; FINL) and other companies that make or sell apparel. However, Foot Locker delivered market-beating results for the October quarter, boosting per-share profits 20%. Same-store sales jumped 8.7%. Since declaring quarterly results Nov. 20, Foot Locker has seen its shares rally 8%.

Despite the weakness in October and early November, Foot Locker shares have still returned 7.1% over the last six months and 19.4% over the last 12. Even after the rally, Foot Locker trades at 16 times trailing earnings, a 12% discount to the average retailer. Foot Locker is a Focus List Buy and a Long-Term Buy.


Over the last 12 months, J.P. Morgan Chase ($65; JPM) has returned 7.7%, above the average of 0.1% for the financial sector. Some of that strength likely stems from increased confidence that the Federal Reserve will boost the federal funds rate at its next meeting, scheduled for Dec. 15 and 16. While higher rates are not necessarily good for lenders, a rate hike could encourage investors by eliminating some uncertainty; the Fed has been telegraphing an increase for months but has yet to pull the trigger.

With rates held near zero for an unprecedented period, we can't be sure how stocks will react. However, the Fed's long runway has given banks plenty of time to prepare for higher rates, and at this point a rate increase would probably be good for financials, at least in the short term. J.P. Morgan is a Buy and a Long-Term Buy.

INCOME STOCKS WITH MOMENTUM
We screened for stocks that topped their sector's dividend yield and exceeded the industry average total return in at least two of the following three periods — three months, six months, and 12 months. Of the stocks we rate A (above average), only 11 made the cut. Stocks in bold are on our buy lists.
------- Total Return -------
------------------------ Quadrix Scores ------------------------
Company (Price; Ticker)
Div.
($)
Yield
(%)
3
Months
(%)
6
Months
(%)
12
Months
(%)
Momen-
tum
Value
Quality
Overall
12-
Factor
Sector
Reranked
Overall
Sector
Aflac ($61; AFL)
1.64
2.7
8.2
(0.8)
5.1
47
87
53
87
58
84
Financials
Amgen
($158; AMGN)
3.16
2.0
5.0
2.4
(5.0)
79
56
88
88
34
87
Health care
Boeing ($144; BA)
3.64
2.5
9.4
3.1
14.1
85
70
92
93
48
82
Industrials
Comcast
($59; CMCSa)
1.00
1.7
3.8
1.5
6.0
61
70
84
89
91
84
Consumer
discretionary
Foot Locker
($66; FL)
1.00
1.5
(6.3)
7.1
19.4
81
69
95
95
69
97
Consumer
discretionary
General Motors
($35; GM)
1.44
4.1
21.1
0.8
11.3
90
94
68
98
72
99
Consumer
discretionary
Home Depot
($132; HD)
2.36
1.8
16.2
20.0
35.1
71
31
96
78
85
87
Consumer
discretionary
Intel ($35; INTC)
0.96
2.8
19.9
11.1
(2.8)
36
67
75
81
39
65
Technology
J.P. Morgan Chase
($65; JPM)
1.76
2.7
6.0
(2.8)
7.7
49
84
66
85
82
84
Financials
Travelers
($111; TRV)
2.44
2.2
13.4
13.3
8.2
68
86
71
95
93
95
Financials
UnitedHealth
($115; UNH)
2.00
1.7
0.4
(1.7)
15.7
66
51
86
64
55
65
Health care
Note: Quadrix scores are percentile ranks, with 100 the best.

 

Dividends by sector

Only three sectors — consumer staples, financials, and technology — rank among the top half of the 10 S&P 500 Index market sectors on average three-, six-, and 12-month returns. Those three sectors combine to account for 43% of the index's dividend payments; and while the tech sector's average yield is among the lowest, all three offer good hunting for dividend-seeking investors.

The yields presented below are not averages, but the total dividend paid by all the stocks in the sector over the last 12 months, divided by their combined market capitalization. Dividend-related numbers are as of the end of November.

 
-------------- Stocks' Average Total Return --------------
S&P 500 Sector
(Number Of Stocks)
Number Of
Dividend Payers
(% Of Sector)
Trailing
Dividend Yield (%)
(Sector Rank)
% Of Index's
Dividends
(Sector Rank)
3 Months (%)
(Sector Rank)
6 Months (%)
(Sector Rank)
12 Months (%)
(Sector Rank)
Cons. Discretionary (84)
68
(81)
1.5
(10)
9.2
(7)
0
(9)
-5
(6)
2
(4)
Consumer Staples (37)
36
(97)
2.7
(4)
12.3
(3)
10
(1)
9
(1)
13
(1)
Energy (40)
34
(85)
3.4
(3)
11.2
(5)
-9
(10)
-26
(10)
-22
(10)
Financials (87)
82
(94)
2.0
(7)
15.6
(1)
6
(3)
-2
(4)
0
(5)
Health Care (56)
34
(61)
1.6
(8)
11.4
(4)
0
(8)
-6
(8)
2
(3)
Industrials (66)
60
(91)
2.3
(6)
10.7
(6)
2
(7)
-5
(7)
-4
(7)
Materials (27)
26
(96)
2.3
(5)
3.0
(10)
2
(6)
-11
(9)
-4
(8)
Technology (69)
47
(68)
1.6
(9)
15.3
(2)
9
(2)
1
(3)
7
(2)
Telecom Services (5)
4
(80)
5.3
(1)
5.8
(8)
3
(5)
-4
(5)
-6
(9)
Utilities (29)
29
(100)
4.0
(2)
5.3
(9)
4
(4)
4
(2)
-3
(6)
Source: Standard & Poor's.
 
Three special sectors

When it comes to income, not all sectors are created equal.

Within the S&P 500 Index, the telecom-services and utilities sectors have the highest yields (5.3% and 4.0%, respectively) but together account for just 11% of the index's total dividends. Telecom and utilities together feature a total of 33 dividend payers; seven other sectors have at least that many individually, and two sectors offer more than double the number of choices.

On the other hand, three sectors — consumer staples, financials, and technology — together account for 43% of the index's dividends and 39% of its 420 dividend-paying stocks. Of the three, only consumer staples is among the top half of the sectors in average yield at 3.4%.

We tend to find more and better stocks in the large sectors than in the small sectors, in part because of the greater selection. However, today's market provides another reason to get excited about consumer-staples, financial, and technology stocks — on average they're performing quite well, and plenty of academic research suggests that stocks going up are a bit more likely to continue going up.

As measured by average total returns for their component stocks, consumer staples, financials, and technology are the only three sectors to rank in the top half for three-, six-, and 12-month periods. Investors seeking income stocks with price momentum should consider starting with those three sectors.

The table above lists 11 A-rated stocks that top their sector yield and have outperformed the average stock in their sector over the last three, six, and 12 months. Four of the stocks are from the three sectors featured above.

 

 


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