By
David
Hunkar
:
When considering dividend-paying stocks, some investors tend to
select stocks with high dividend yields rather than the long-term
total return. However this is not a winning strategy. Instead of
falling into the so-called "yield trap", investors are better off
picking stocks based on total return over the long-term, according
to a
research report
by Invesco published earlier this year.
Click to enlarge
(click to enlarge)
Among the S&P's ten sectors, traditionally the utility sector
has had the highest dividend yield. But the sector ranks the sixth
in terms of total return during the period shown in the chart
above. On the other hand, the consumer staples sector has lower
yield than the utilities sector and is comprised of many of the
oldest dividend payers and growers. But this sector ranked the
highest in total returns during the same period. The financial and
telecom sectors also returned lower total returns despite having
high dividend yields.
In order to test this theory I reviewed the
ETFs
corresponding to the ten S&P sectors. The current dividend
yields of the SPDR ETFs for the sectors are noted below:
| S.No. |
S&P Sector |
ETF Name |
Ticker |
Dividend Yield as of Nov 23, 2012 |
| 1 |
Consumer Discretionary |
Consumer Discretionary Select Sector SPDR Fund |
[[XLY]] |
1.45% |
| 2 |
Consumer Staples |
Consumer Staples Select Sector SPDR Fund |
[[XLP]] |
2.71% |
| 3 |
Energy |
Energy Select Sector SPDR Fund |
[[XLE]] |
1.71% |
| 4 |
Financials |
Financials Select Sector SPDR Fund |
[[XLF]] |
1.69% |
| 5 |
Health Care |
Health Care Select Sector SPDR Fund |
[[XLV]] |
1.95% |
| 6 |
Industrials |
Industrials Select Sector SPDR Fund |
[[XLI]] |
2.20% |
| 7 |
Information Technology |
Technology Select Sector SPDR Fund |
[[XLK]] |
2.15% |
| 8 |
Telecommunication Services |
Technology Select Sector SPDR Fund |
[[XLK]] |
2.15% |
| 9 |
Materials |
Materials Select Sector SPDR Fund |
[[XLB]] |
2.08% |
| 10 |
Utilities |
Utilities Select Sector SPDR Fund |
[[XLU]] |
3.60% |
Note: The SPDR Technology Select Sector ETF represents both
the S&P Information Technology and Telecommunication Services
sectors.
Source:
SPDR
The SPDR Utilities Select Sector ETF has the highest dividend
yield at 3.60% and the Consumer Staples ETF has a yield of
2.71%.
In terms of returns, the 5-year return for XLP is 7.96% while
the XLU grew by just 2.15%. For the 10-year period, XLU was up by
10.94% and XLP was up 8.55%.
The following chart shows the 5-year price return of the
utilities and consumer staples sector ETFs:
Click to enlarge
(click to enlarge)
The utilities sector ETF severely lagged the performance of the
consumer staples sector ETF. If dividends were added and total
returns calculated the variance would be even higher.
The following chart shows the price return of the utilities and
consumer staples sector ETFs since 1999:
Click to enlarge
(click to enlarge)
Source:
Google Finance
In the long-term also, the utilities sector ETF's return was
lower than that of the consumer staples sector ETF's return.
At the individual stock level, a $10,000 investment in Exelon
Corp (
EXC
), a randomly electric utility, would be worth $4,602 now. However
the same investment in two consumer staple stocks Procter &
Gamble (
PG
) and Colgate-Palmolive (
CL
) would be worth $10,609 and $15,104 respectively. Hence investors
may want to avoid picking stocks purely on high dividend yields and
instead focus on long-term total returns.
Disclosure:
No Positions
See also
Railroad Stocks Appear Attractively Valued Across
The Country
on seekingalpha.com