Sector Yields May Surprise You

8/14/2017


Income investors confront a shifting landscape amid steady gains for U.S. stocks. The S&P 1500 Index has relentlessly marched higher this year, already setting 27 all-time highs. That compares to 19 record highs in all of 2016 and 12 in 2015.

The S&P 1500's dividend yield has been equally persistent, hovering near long-term norms. But the index has undergone a sharp change in how its 11 sectors contribute to the overall yield.

On average, utilities currently yield 3.0%, lower than 99% of monthly periods since 1994 and well below their average of 4.3% over that period. Sectors with unusually high average dividend yields include consumer discretionary (2.5% versus long-term average of 2.0%), energy (2.3% versus 1.7%), and telecommunication services (6.0% versus 4.3%). These three sectors have sported higher dividend yields in less than 20% of monthly periods.


Sector yields diverge from historical norms

The average S&P 1500 utility stock currently yields 3.0%, well below its sector average of 4.3% since 1994. In roughly 99% of months since 1994, utility stocks have averaged higher yields. On the opposite end of the spectrum, just 8% of the time have consumer-discretionary stocks averaged yields higher than their current 2.5%.

-- Dividend Yield --
3-Year
Annualized
Dividend
Growth
(%)
% Of Stocks
Yielding More
Than Their
3-Yr. Avg.
S&P 1500 Sector
(Number Of Dividend Payers)
Current
(%)
Long-Term
Average
(%)
Payout
Ratio
(%)
Consumer Discretionary (155)
2.5
2.0
12
65
36
Consumer Staples (57)
2.4
2.2
13
61
51
Energy (42)
2.4
1.7
(6)
57
58
Financials (183)
2.4
2.3
15
34
37
Health Care (59)
1.6
1.4
8
46
31
Industrials (173)
1.6
1.8
11
36
33
Materials (74)
2.0
2.2
9
45
37
Real Estate (100)
4.5
5.3
13
62
77
Technology (101)
1.8
1.4
12
37
32
Telecommunication Services (9)
6.1
4.3
4
89
80
Utilities (54)
3.0
4.3
6
19
61
S&P 1500 Index (1,006)
2.4
2.3
11
46
39
Note: Dividend data goes back to 2001 for the real estate sector and 1994 for the other 10 sectors.

That churn has driven income investors to hunt in new sectors. S&P 1500 sectors with an abundance of stocks yielding more than their own three-year average include telecommunication services and consumer discretionary. By comparison, just 22% of utilities and 29% of financial stocks have unusually high dividend yields. In all, just 42% of dividend-paying stocks currently yield more than their three-year average.

Picking stocks based on dividend growth has worked better than selecting just the top-yielders. S&P 1500 stocks in the top quintile of our research universe by yield have lagged the average stock by 0.4%, based on rolling 12-month returns since 1994. Stocks with the highest five-year dividend growth have outperformed by 0.3%, while stocks with the strongest three-year dividend growth have outperformed by 0.8%. Still, with interest rates historically low, high-yield stocks still have a lot of appeal for income investors. 

Below we present a list of A-rated stocks sporting dividend yields above their historical norms. Four of our favorite picks are reviewed in greater detail below.

Admittedly, airlines aren't known for their big cash payouts to investors. But Alaska Air Group's ($84; ALK) dividend looks attractive relative to both the industry and its own historical norms. Alaska has grown its dividend at an annualized rate of 37% over the past three years, pushing its yield to 1.4%, up from a three-year average of 1.2%. Dividend-paying airline stocks in the S&P 1500 Index average yields of 1.3% and three-year dividend-growth rates of 28%.

Alaska shares are down 4% this year. Airline stocks have slumped an average of 5%, partly on renewed worries about price competition. Like other airlines, Alaska has seen its profit growth constrained by higher costs. But its operating momentum is holding up better than most of its peers, helped by the $2.6 billion acquisition of Virgin America in December. Alaska Air's per-share profits are down just 1% for the 12 months ended June, while sales rose 21%. As an industry, airlines are averaging 15% lower profits and 6% higher sales.

Alaska Air said traffic rose 6.6% in July, while capacity expanded 6.4%. Load factor, a key efficiency metric for airlines, improved to 87.0% from 86.8% last July. Alaska Air is a Buy and a Long-Term Buy.


CDW ($63; CDW) shows why income investors shouldn't screen for dividend stocks by yield alone. The stock yields just 1.0% but has raised its dividend 49% to 59% each year since launching the distribution in 2013. A similar dividend hike this year could push the stock's dividend yield to 1.5%. Each dividend announcement arrived in early November.

Expectations for another big dividend hike seem reasonable. Cash from operations rose 36% in the 12 months ended June.

CDW grew June-quarter earnings per share 10% to $1.03 excluding special items, matching the consensus. Sales, up 9% to $3.99 billion, surpassed analyst expectations. Management added $750 million to its stock-buyback plan, which had $283 million remaining at the end of June Altogether, CDW is now approved to repurchase about 10% of its remaining shares. The company has shaved 8% off its share count over the past two years. CDW is a Focus List Buy and a Long-Term Buy.


Like many banks, Citizens Financial Group ($35; CFG) delivered modest June-quarter loan growth, up 6% from the same time last year and up 1% from the March quarter. Unlike many banks, Citizens also grew deposits. Although Citizens' net interest margin lags many regional banks in the S&P 1500 Index, it has expanded in six straight quarters — the same can be said of just eight of the other 78 regional banks in the index. Net interest margin represents the spread between the interest banks pay on deposits and the interest they charge for loans.

Citizens also stands apart from other banks with its uncommon enthusiasm for growing the dividend, which it introduced in 2014. Over the past three years, the company's annualized dividend growth of 93% exceeds any of the other 72 dividend-paying regional banks in the S&P 1500 Index. Most recently, Citizens hiked its dividend 29% in August and plans an additional 22% increase in early 2018.

The stock yields 2.1%, ranking in the top 30% of stocks in our research universe, and well above its three-year average yield of 1.5%. Just one other regional bank currently yields more than its three-year average. Citizens Financial is a Focus List Buy and a Long-Term Buy.


Rising fuel and operating costs have squeezed Southwest Airlines' ($55; LUV) profit margins in each of the past four quarters. As a result, its per-share profits fell 16% in the 12 months ended June. But sales climbed 3% and cash from operations 1% during that period. Encouragingly, management said cost pressures should begin to ease in the second half of the year and could decline in 2018. Additionally, Southwest's traffic increased 6.0% in July, ahead of its 5.5% capacity growth. The load factor improved to 87.3% from 86.9% a year earlier. The company also reiterated that unit revenue should grow about 1% in the September quarter. Shares rose on the report.

Southwest hiked its dividend 25% in the June quarter, the fifth straight year its annual dividend increase has met or exceeded 25%. Its annualized dividend growth rate stands at 78% over the past five years, ranking among the highest 2% of our research universe. Southwest dedicates just 15% of earnings to its dividend, allowing plenty of flexibility for future growth. Southwest, yielding 0.9%, is a Focus List Buy and a Long-Term Buy.

EXPANDING DIVIDEND YIELDS
We screened for A-rated stocks with dividend yields equal to or above their 3-year average. We recommend the stocks in bold.
Div. Yield
3-Year
Ann. Div.
Growth
(%)
Company (Price; Ticker)
Div.
($)
Curr.
(%)
3-Yr.
Avg.
(%)
Payout
Ratio
(%)
Quadrix
Overall
Score
S&P 1500
Sector
AbbVie ($72; ABBV)
2.56
3.6
3.4
14
50
94
Health care
Alaska Air ($84; ALK)
1.20
1.4
1.2
37
16
98
Industrials
Amgen ($174; AMGN)
4.60
2.7
2.2
26
37
96
Health care
CDW ($63; CDW)
0.64
1.0
0.9
85
18
71
Technology
Citizens Financial
($35; CFG)
0.56
1.6
2.1
93
24
98
Financials
D.R. Horton
($36; DHI)
0.40
1.1
1.0
72
15
89
Cons.
discretion.
Delta Air Lines
($50; DAL)
0.81
1.6
1.2
50
16
94
Industrials
EQT Midstream Part.
($73; EQM)
3.56
4.9
3.5
23
69
86
Energy
FedEx ($206; FDX)
1.60
0.8
0.7
39
13
96
Industrials
Home Depot
($155; HD)
3.56
2.3
2.0
22
53
76
Cons.
discretion.
Intel ($37; INTC)
1.09
3.0
2.9
5
37
90
Technology
Lear ($145; LEA)
2.00
1.4
1.0
29
13
99
Cons.
discretion.
Lowe's ($78; LOW)
1.40
1.8
1.6
24
34
84
Cons.
discretion.
Magna Int'l
($48; MGA)
1.10
2.3
2.1
4
20
98
Cons.
discretion.
Snap-on ($155; SNA)
2.84
1.8
1.5
17
29
91
Industrials
Southwest Airlines
($55; LUV)
0.50
0.9
0.8
33
14
97
Industrials
Union Pacific
($104; UNP)
2.42
2.3
2.3
14
44
74
Industrials
Note: Quadrix scores are percentile ranks, with 100 the best.

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