Making Dividend Plays Pay

S&P's list of 30 high-yielding, high-quality issues might be just the ticket for wary investors

From Standard & Poor's Equity Research

Dividends—those steady streams of periodic payments received by equity investors—may seem as unexciting as a Social Security check, but you might think again when you realize that reinvested dividends have actually contributed more than 40% of the S&P 500's total return since 1929. What's more, the S&P 500 dividend yield averaged nearly 4% in all years since the mid-1930s and averaged nearly 6% during the 1940s.

Things look a little different these days, of course. The yield on the "500" has averaged only 1.6% thus far in this decade, after averaging only 2.4% during the 1990s. Yet things are shaping up. S&P's Index Services Dept. recently reported that dividend payouts by companies in the S&P 500 have risen 11% in the past 12 months to $54.5 billion.

S&P believes the U.S. economy is in the early stages of an economic slowdown. We think equities may be stuck in a trading range, as a number of factors may combine to limit gains. As a result, S&P's Investment Policy Committee reiterates its single-bull stance and forecasts the S&P 500 to end the year at 1,315, 5% higher than where it started.


  Due to the expected tepid market performance, S&P recommends that investors gravitate toward sectors and companies that offer relatively high dividend yields and have consistently increased their earnings and dividends over an extended period of time. So where does an investor go to uncover these potential total return investment gems?

Take a look at the table below, which shows the dividend yield, payout ratio, and concentration of companies with above-average S&P Quality Rankings (also known as Earnings & Dividend Rankings) for each of the 10 sectors in S&P's large, mid- and small-cap benchmarks. We see that the S&P 500's current indicated dividend yield is 1.9%, while the S&P MidCap 400 pays a 1.3% yield and the S&P SmallCap 600 offers only a 1% yield. And while 77% of the companies in the S&P 500 pay a dividend, 62% in the MidCap 600 pay one, and only 46% do in the SmallCap 600.

Within the "500," six sectors pay an above-average yield: Consumer Staples, Financials, Industrials, Materials, Telecom Services, and Utilities. In the mid- and small-cap indices, only three sectors offer yields equal to or greater than the overall benchmark. What's more, only Financials, Materials, and Utilities pay at or above-index-average yields across the size spectrum, while Information Technology consistently offers the lowest dividend yield.

All sectors in all cap sizes have companies that pay a dividend, except the small-cap telecommunications services sector. The highest yielding company in the S&P 500 is Citizens Communications (CZN; S&P investment rank 4 STARS, buy) at 7.4%.

  Dividend Yields, Payout Ratios and High S&P Quality Rank Exposure
Before it's here, it's on the Bloomberg Terminal.