Big dividends or stock gains? S&P 500 investors usually must choose between the two — but not this year.
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In a radical twist, all eight of the very highest yielding stocks in the S&P 500 are also topping the market in terms of stock price gains. That includes every S&P 500 stock yielding 6% or more, including energy firms Oneok (OKE) and Exxon Mobil (XOM), plus communications services firm Lumen Technologies (LUMN).
On top of paying an average dividend of 6.94%, these stocks as a group are up a whopping 24.8% in 2021 so far. That’s well in excess of the S&P 500’s 1.5% yield and 4.1% price gain this year.
The dividend-stock rally is a further sign of how the market is broadening out beyond just the megacap S&P 500 technology champions. The top three sectors of the year, Energy Select Sector SPDR (XLE), Financial Select Sector SPDR (XLF) and Industrial Select Sector SPDR (XLI), are all historically among the top dividend payers.
“Dividends are the thing to watch, since they are an important signal of corporate board confidence in future earnings power,” said Nicholas Colas, co-founder of DataTrek Research.
Dividend S&P 500 Stocks Shine?
Seeing dividend stocks in the S&P 500 do well is a big departure from years past. Chasing dividends actually cost you money for years — and that’s a good reminder to go for dividend stocks you can count on instead.
More than 400 stocks in the S&P 500 paid a dividend going into 2020, says S&P Global Market Intelligence. Of those dividend-paying stocks, 167, or 40%, saw their shares fall enough during the year to wipe out the entire year’s dividend yield, or worse. And nearly two-thirds of dividend stocks dropped by more than their yield in a less bullish 2018.
But it’s a whole new ballgame in 2021 so far.
S&P 500 Energy Gushes Dividends And Gains
Energy is certainly a big reason for the dividend push. Half of the eight highest yielding stocks in the S&P 500 are all in energy. All are also topping the index this year in terms of price gains.
Just look at the Energy Select Sector SPDR as an example. It yields 8.1%, or many times more than the 1.5% yield of the SPDR S&P 500 ETF Trust (SPY). But on top of that, it’s up 29.8% this year, outstripping the 4.2% gain by the S&P 500 index.
Take Oneok as a case in point. The natural gas processor in Tulsa, Okla., yields more than any other S&P 500 company, 7.67%. But on top of that rich yield is a stock that’s up 29.8% this year to 49.82.
And it’s a similar story at S&P 500 energy giant Exxon Mobil. The $239 billion integrated oil company got booted out of the Dow Jones Industrial Average last year. And yet, on top of an impressive 6.18% dividend yield, the stock is up 36.8% this year.
S&P 500 Dividend Stocks Flying Not Just In Energy
Don’t think this is just an energy-stock bounce phenomenon.
Energy stocks only account for 6.3% of the $35 billion-in-assets Vanguard High Dividend Yield ETF (VYM). Most of the portfolio is in financials, health care and consumer staples companies. It yields 3.05%. And yet, the Vanguard High Dividend Yield ETF is up 9.3% this year, which is double the gain of the S&P 500.
Communication services are also playing in the high dividend rally. If the 7.56% yield of Lumen Technologies didn’t get your attention, its 39.6% stock-price rise this year would. Lumen is a voice and data telecommunications firm.
Nothing Lasts Forever In The S&P 500
Don’t expect these dividend stocks to keep pulling away.
Many are already paying out so much of their profit it will be hard for them to boost it by much more. Their IBD Composite Ratings are still average (70) or lower as earnings remain moribund.
Additionally, cash is piling up at many S&P 500 companies. That means it’s likely dividends at other companies will rise, adding to competition for investors’ money.
S&P 500 companies are sitting on a record amount of cash, in excess of $1.9 trillion, says Howard Silverblatt of S&P Dow Jones Indices. “Looks like consumers are not the only ones ready and able to spend,” he said.
All The Highest-Yielding S&P 500 Stocks Are Beating The Market
| Company | Symbol | YTD % Ch. | Dividend Yield % | Sector | Composite Rating |
|---|---|---|---|---|---|
| Oneok | (OKE) | 29.8% | 7.67% | Energy | 78 |
| Lumen Technologies | (LUMN) | 39.6% | 7.56 | Communication Services | 61 |
| Williams Companies | (WMB) | 19.6% | 6.98 | Energy | 78 |
| Altria Group | (MO) | 22.7% | 6.95 | Consumer Staples | 74 |
| AT&T | (T) | 4.7% | 6.94 | Communication Services | 24 |
| Iron Mountain | (IRM) | 25.3% | 6.79 | Commercial svcs, document mgmt | 70 |
| Kinder Morgan | (KMI) | 19.8% | 6.49 | Energy | 61 |
| Exxon Mobil | (XOM) | 36.8% | 6.18 | Energy | 37 |
| S&P 500 | 4.1% | 1.50% | Energy | 37 |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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