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%).
Meanwhile, HDV (up 4.3% year to date through July 28) and PEY (up 3.2%) have significantly lagged the S&P 500 index, due to their exposure to slower-growth, defensive sectors that have underperformed. Both HDV and PEY earn favorable risk considerations to CFRA for the holdings-based risk considerations inputs as well as for its low standard deviation.
In addition, these two ETFs have lagged the year to date 7.0% total return for the Lipper equity income mutual fund peer average. However, while index-based ETFs follow regimented rules, active mutual funds have more discretion and can focus on a range of income and growth attributes that can impact their record.
Related: 10 Hugely Popular ETF Plays in July
For example, ClearBridge Dividend Strategy Fund (SOPAX), a CFRA four-star ranked mutual fund is up 9.7% year-to-date. The fund seeks a combination of dividend income, dividend growth and long-term capital appreciation, but using fundamental analysis to select a diversified portfolio of companies with long histories of paying and raising dividends.
Financials (17%), technology (13%) and consumer staples (13%) are the largest sectors, with Apple (AAPL) and Berkshire Hathaway (BRK.B) among the top-10 holdings.