The best dividend stocks among the S&P's strongest sectors of 2016

CenterPoint Energy and AT&T are among companies with attractive yields and a steady flow of dividends for at least 5 years.

  • By Philip van Doorn ,
  • MarketWatch
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The strongest sectors of the S&P 500 (.SPX) this year include many shares of companies that pay high dividends and have kept investors' faith by not cutting payouts for at least the past five years.

Dividend defense strategy

In today's rough market, it's important to find steady dividend payers.

The two hot sectors are telecommunications services and utilities, and Howard Gold looked at the reasons for their strength.

These sectors are known to feature many stocks with high dividend yields. The market values of income-producing investments are sensitive to changes in interest rates, and all things being equal, that's a concern when interest rates look set to rise, as is the case this year. But things aren't always equal, especially if a company paying nice dividends is also growing its business.

During 2015, there was plenty of fear that interest rates would rise rapidly. The utilities sector had a negative return of 5%, even with dividends reinvested, while the telecommunications sector had a relatively decent total return of 3%. But it has been very clear in 2016 that Federal Reserve policy makers, led by Chairwoman Janet Yellen, are taking the sluggish world economy into account and are in no hurry to raise rates. This has provided quite a boost for utilities and telecoms, which feature many companies with dividend yields that are very attractive. That's especially true considering that 10-year U.S. Treasury notes yielded just 1.76% on Wednesday.

Here's a breakdown of how the 10 sectors of the S&P 500 have fared so far during 2016, with dividends reinvested:

S&P 500 sector Total return - YTD, through April 6
Telecommunications Services 16%
Utilities 13%
Consumer Staples 7%
Industrials 4%
Materials 4%
Energy 3%
Information Technology 3%
Consumer Discretionary 1%
Health Care -2%
Financials -6%
S&P 500 2%

Source: FactSet

We included reinvested dividends for a fair comparison of total returns, but many investors holding stocks in utilities and telecommunications companies don't reinvest — they want the dividend income.

Some companies among the two sectors have cut dividends, and their executives certainly believed they had good reasons to make those cuts. They may have needed to hold on to the cash to fund acquisitions, for example. But income-seeking investors were sure to be disappointed no matter the reasons.

So we narrowed the list to the highest-yielding S&P 500 telecom and utility stocks that not only paid regular cash dividends for the past five years, but also didn't cut dividends payouts:

Company Ticker Dividend yield Total return - YTD Average annual total return - 5 years Price/ consensus 2016 EPS estimate
CenterPoint Energy Inc. CNP 4.97% 15% 7.7% 18.2
AT&T Inc. T 4.97% 15% 10.6% 13.6
Entergy Corp. ETR 4.40% 14% 7.9% 15.0
Southern Co. SO 4.31% 9% 10.4% 17.7
Verizon Communications Inc. VZ 4.22% 18% 12.3% 13.4
Duke Energy Corp. DUK 4.16% 12% 12.3% 17.2
PPL Corp. PPL 4.05% 11% 15.0% 16.0
Dominion Resources Inc. D 3.85% 9% 14.3% 19.1
Public Service Enterprise Group Inc. PEG 3.56% 20% 12.5% 15.9
Consolidated Edison Inc. ED 3.55% 18% 12.7% 18.8
S&P 500 .SPX 2.16% 2% 11.5% 17.2

Source: FactSet

Among the companies on this list, AT&T Inc. (T) and Consolidated Edison Inc. (ED) also are among the 50 stocks included in the S&P 500 Dividend Aristocrats Index which is maintained by S&P Dow Jones Indices.

The Dividend Aristocrats are 50 S&P 500 companies that have raised their regular cash dividends for at least 25 straight years. The group had a stellar first quarter.

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