Want Yield? Expect To Pay Up
Historically, stocks with high dividend yields have been much cheaper than those that pay no dividends.
These days, not so much.
Since 1994, stocks in the top quintile (one-fifth) of the S&P 1500 Index's dividend-payers as measured by yield averaged Quadrix Value scores of 67, while the second-highest-yielding quintile scored 64. On average, the highest and second-highest quintiles earned scores a respective 33% and 27% above those of stocks that pay no dividends.
Value scores for the index's higher-yielding stocks have trended lower since 2008, when bond yields collapsed amid Federal Reserve efforts to revive the economy. The top quintile on yield now averages a Value score of 56, just 3% above those of nonpayers, while the second-highest yielders' Value scores have fallen below those of nonpayers.
We found a similar trend with price/earnings ratios. Since 1994, the top two yield quintiles averaged P/Es of 18, at least 24% below the average of more than 24 for non-dividend-payers. Today, that spread has narrowed, with the average P/E for the top quintile 16% below the typical nonpayer, while the second-highest-yielding quintile trades at just a 2% discount.
Investors willing to pay up for those high-yielding stocks will be purchasing less growth despite the premium price. On average, the top-yielding stocks saw sales fall 2% and per-share profits 3% in the last 12 months. Since 1994, those stocks averaged sales growth of 3% and profit growth of 0%. Credit the lack of profit growth at least in part to the fact that, historically, utilities have made up nearly one-third of the high-yield group, while the higher-growth sectors energy, health care, and tech combined to account for only 6% of the stocks.
The second-highest-yielding quintile saw a similarly stark change — 1% growth in sales and profits over the last 12 months versus a long-run average of 5% sales growth and nearly 6% profit growth since 1994.
The highest-yielding stocks' growth rates also lag those of stocks that pay smaller dividends, or no dividends at all. For a list of every stock in the top yield quintile, visit www.DowTheory.com/Go/TopYield.
At this point, you might be wondering where you can find high-quality stocks that pay a decent yield. Well, look no further than the table below. All 12 of the stocks presented yield enough to qualify for one of the top two quintiles of the S&P 1500's dividend-payers and also earn Value scores of at least 70. In addition, most have delivered growth superior to that of the typical high-yielding stock over the last 12 months.
In the following paragraphs, we review three of these appealing stocks:
Ciner Resources ($30; CINR) processes sodium sesquicarbonate, often called trona, into soda ash, a component of glass, detergents, chemicals, and a variety of other products. About three-fourths of soda ash is synthesized, rather than extracted from trona. Ciner says the cost of producing soda ash from trona is 40% to 60% cheaper than the cost of synthetic production, giving the company a massive and sustainable cost advantage.
Ciner's reliance on natural resources also allows it to operate as a master limited partnership (MLP), avoiding taxation at the corporate level. This tax treatment allows the company to pay a generous 7.4% dividend, but requires investors to do some extra work at tax time. For more on MLPs, visit www.DowTheory.com/Go/MLP. Ciner is rated Buy in our sister publication Upside, which focuses on small stocks.
Late last month, J.P. Morgan Chase ($60; JPM) passed a Federal Reserve stress test designed to assess whether banks have enough capital to cover losses in the event of an economic shock. The company's Quadrix Overall score of 83, tops among the big U.S. banks, reflects scores above 80 in Value, Financial Strength, and Earnings Estimates.
Analysts don't expect much from the massive company (sales of $100 billion over the last year, stock-market value of $222 billion). The consensus projects a decline in sales and profits this year before a recovery to 5% sales growth and 12% profit growth in 2017. J.P. Morgan has met or exceeded the consensus in each of the last 13 quarters, averaging surprises of nearly 11% in the last four quarters. J.P. Morgan Chase, yielding 3.2%, is rated Long-Term Buy.
In the July issue of Upside, we added Summit Hotel Properties ($13; INN), already an Upside Buy, to the Best Buy List. The stock's Overall score of 96 is tops among the 46 real estate investment trusts (REITs) on our Alternative Income Watch List, which average scores of 46. If a REIT distributes at least 90% of its income to investors, it can avoid corporate taxes. Not surprisingly, most REITs pay generous dividends; Summit yields 4.0%.
Summit owns 80 properties with nearly 11,000 rooms, consisting mostly of premium hotels. Analysts expect sales growth of 3% and per-share-profit growth of 7% this year, slowing to 1% and 5%, respectively, next year — unduly modest targets. Summit trades at less than 10 times expected 2016 earnings. To learn more about REITs, go to www.DowTheory.com/Go/REIT.
Not all sectors behave the same
While high-yield stocks as a whole are pricier than historical norms, as charted above, not all sectors have ridden that train.
We analyzed Value scores and P/E ratios for the top-yielding quintile of nine market sectors (telecom didn't have enough companies for comparison) and learned the following:
• In every sector except financials, since 1994 the highest-yielding stocks averaged a discount of at least 13% to the sector average P/E, with Value scores at least 13% higher than the sector average. Today, however, high-yielders in three sectors (consumer staples, financials, and utilities) earn lower Value scores than their sector averages.
• Based on recent prices, five of the nine sectors have seen their P/E discounts erode, with high-yielders in the energy sector now more expensive than the typical energy stock. Relative to historical P/E spreads, high-yielders in the energy, financial, and utilities sectors seem most expensive; their P/E ratios are at least 18% above historical norms. In contrast, high-yielders in the consumer-discretionary, health-care and technology sectors trade at a greater discount than usual.
• In seven of the nine sectors, high-yielders have become more expensive relative to the typical stock based on Value score. High-yielders in the defensive consumer-staples and utilities sectors average Value scores at least 20 points lower than the long-run average.Â
In today's market, investors looking for high-yield stocks should consider sectors not known for yield. High-yielders in the consumer-discretionary, health-care, materials, and technology sectors tend to enjoy substantially higher Value scores than nonpayers, while their P/E ratios are lower. In all four sectors, high-yielders enjoy a larger discount to nonpayers than historical norms.