Stocks which pay dividend income can be one of the more sought after investments, and for good reason: Benchmark bond interest rates continue to remain at historically low levels. For example, the 10-year Treasury bond is yielding just 1.97% as of mid-May 2013. Meanwhile, the S&P 500® Index yields 2.17% as of mid-May 2013.
Perhaps as a result, stocks have recently been the more attractive option for fund investors. Equity flows, which represent more than 60% of long-term fund flows, are outpacing bonds year to date.1
Given the relatively strong yield and flow characteristics of stocks right now, there may be a number of potentially attractive income opportunities in equities.
Telecom, utilities, and consumer staples stocks generally offer the highest dividend yield (see the chart below). Consumer discretionary is the lowest-yielding sector, followed by financials and information technology.
However, yield is not the only consideration for investors, particularly in light of the stock market setting all-time highs. It’s possible to look for opportunities that provide income and growth potential. As the chart below shows, technology and discretionary stocks are heavily weighted components of the Russell 1000® Growth Index (they account for 28.6% and 17%, respectively), and the bottom three sectors make up a high percentage (37%) of the total index dividends paid.
This disparity may be a significant factor to consider for investors interested in large-cap, high growth stocks with high dividend yields. Large-caps have underperformed mid- and small-cap stocks over the past 10 years (see the chart below).
Large-cap growth stocks, in particular, have been the lowest performing among the market cap style. One possible reason for this underperformance may be due to the discretionary and technology sectors, which tend to make up a large composition of large-cap growth stocks, offering comparatively low yields.
In this yield-seeking environment, investors appear to have preferred styles other than large-cap growth stocks. With that said, in the outperforming mid-capitalization group, growth underperformed as well against value and blend. One conclusion that could be drawn is that investors may have considered value over growth to be of more significance than the level of dividend yield.
Nevertheless, income remains an important objective for many investors. If you believe that the underperformance of large-cap growth stocks makes them attractive from a valuation perspective, it is possible to screen for opportunities with high dividend yields and potentially attractive growth prospects.
When screening the market for opportunities, be selective. Look for candidates that fit your risk and return objectives. Fidelity’s Stock Research Center has a Screener that can help you filter the market for common stocks and focus on specific characteristics of your choosing.
Let’s take a look at a few filters that can easily be found on the right side of Fidelity’s Stock Screener page (under Most Popular Screening Criteria) which can be used to find high-yielding dividend stocks with growth potential. As of May 21, 2013, three large-cap common stocks using filters consisting of lowest PEG (price/earnings to growth ratio) and highest dividend yield are:
- CenturyLink Inc. (CTL) – 5.74% dividend yield
- FirstEnergy Corp. (FE) – 5.08% dividend yield
- AT&T Inc. (T) – 4.84% dividend yield
In addition to these stocks, the large-cap group could see more higher-yielding stocks. Despite the comparatively lower yield that certain heavily weighted sectors in the large-cap group offer, several of the largest tech and financial firms from these sectors have recently initiated dividend increases.
Not only that, but a large percentage of technology companies populate the list of non-financial companies in the S&P 500 that have the most cash on their balance sheet (see the chart below). This presents the possibility that large-cap tech stocks could be a strong source of potential dividend increases due to their large cash and short-term investment balances.
Alternatively, if you are interested in riding the momentum wave of mid-cap stocks, there are a number of opportunities that have even higher dividend yields than large-cap stocks using the same settings. As of May 21, 2013, three mid-cap common stocks using filters of lowest PEG and highest dividend yield are:
- Norbord Inc. (NBRXF) – 7.53% dividend yield
- New York Community Bancorp Inc. (NYCB) – 7.19% dividend yield
- Home Loan Servicing Solutions Ltd. (HLSS) – 7.11% dividend yield