Higher Dividend Yield Funds Offer Favorable Risk Consideration

By Todd Rosenbluth, CFRA

As we noted in a related article last week titled “A Look at Dividend Growth Securities Performing Well” the more economically sensitive technology and consumer discretionary sectors’ contributions to the S&P 500’s indicated dividend rate has climbed to 15.5% and 9.0% at the end of June 2017, up from 14.7% and 8.1% at the end of 2012.

In contrast, the consumer staples, utilities and telecom services sectors’ contributions dipped to 12.3%, 5.6% and 5.5%, respectively, from 14.1%, 6.6% and 6.5%. Year to date through July 28, telecom services lost nearly 9%, while the return in the technology sector logged in at 22%.

However, in late July, the average dividend yields for the S&P 500 telecom services (4.8%), utilities (3.5%) and consumer staples (2.7%) sectors were above the S&P 500’s (2.0%) and the consumer discretionary (1.4%) along with technology (1.4%) sectors. For investors seeking above-average income combined with capital appreciation potential, these defensive sectors still offer some strong choices.

iShares Core High Dividend (HDV), a $6.3 billion offering, had 22% of assets in consumer staples, 13% in telecom services and 5% in utilities at the end of June, all above the sector representation in the S&P 500 index. CFRA buy recommended AT&T (T) and Coca-Cola (KO) are two of the fund’s recent largest holdings. Meanwhile, consumer discretionary (4%) and technology (12%) exposure was more modest.

Another dividend-yield focused offering is PowerShares High Yield Equity Dividend Achievers Portfolio (PEY). With nearly $1 billion in assets, PEY also had high exposure to the defensive sectors, but in a different combination. PEY recently had more in utilities (27%) and less in consumer staples (18%) and telecom services (5%). The PowerShares ETF has a higher weighting to consumer discretionary (13%) than to technology (6%).