At High Yields, You Get Few Choices
The pickier you get about yield, the tougher it is to build a diversified portfolio.
Consider that since June 1999, financial stocks have made up an average of 21% of the stocks in our research universe. Technology is the next-most-populous sector, accounting for 19% of stocks. But financials have accounted for an average of 44% of dividend-paying stocks, versus just 4% for technology.
Financials and utilities make up unusually large proportions of dividend-paying stocks relative to their shares of the total universe. Conversely, most health care and technology stocks do not pay dividends and are sharply underweighted relative to the market in dividend-oriented portfolios.
Check out the table that breaks down sector exposure by yield. Since 1999, financials and energy stocks have combined to account for about 78% of all stocks yielding 12% or more. In contrast, the consumer discretionary, health care, industrials, materials, and technology sectors made up only about 17% of extremely high-yield stocks.
Our research shows that stocks with the highest dividend yields have historically generated returns no better than those of the average dividend-paying stock. Investors seeking income would generally be better off pursuing stocks with superior fundamentals and lower yields. Among dividend-paying stocks, those with yields between 2.8% and 4.2% have historically generated the best returns.