Beware, Income Investors
Consumer-discretionary stocks are more volatile and lower-yielding than staples shares.
By
LAWRENCE C. STRAUSS
September 25, 2017
Getty Images
In search of solid dividend ideas, this column has been working its way across the Standard & Poor’s 500’s 11 sectors.
The latest stop is consumer-discretionary stocks, which recently were yielding a modest 1.46%. That’s well below the Standard & Poor’s 500’s average of about 2% and surpasses only technology at 1.33%.
Still, as the table below shows, there are consumer-discretionary companies that do yield more than 2%.Barron’salso looked for companies with market capitalizations above $15 billion, forward price/earnings ratios below 15 times, and payout ratios below 50%.
The consumer-discretionary issues in the S&P 500 have returned about 10% this year, some two percentage points behind the broader index.
For income-seeking investors, the sector has drawbacks besides the lower yields. For example, with retailing stocks, one part of the consumer-discretionary group, “you have to be very cautious about the Amazon effect,” says John Gomez, president of Santa Barbara Asset Management. The firm advises the $3 billionNuveen Santa Barbara Dividend Growthfund (NSBRX).
Another concern: Discretionary names can be more volatile than consumer-staples shares. In bad times, observes Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, “they decline more.” However, he notes, they often have stronger rebounds.
In 2008—prime time for the financial crisis—S&P 500 consumer-discretionary shares plummeted by 34.7%, versus a 17.7% decline for staples companies. In the following year, the stocks of discretionary companies gained 38.8%, on average, far more than staples’ 11.2%.
But during 2008 and 2009, discretionary stocks had a lot more dividend cuts than their staples counterparts did.
One of the Santa Barbara fund’s consumer-discretionary holdings isGeneral Motors(GM), which, Gomez maintains, can boost its dividend at a high-single-digit clip over the next few years. The auto maker’s payout is expected to be flattish this year, but the company “opted for a share buyback of approximately 10% of its float,” notes Gomez, adding that its “payout ratio is still very reasonable at 25%.”
IN OTHER NEWS,Microsoft(MSFT) declared a quarterly dividend of 42 cents a share, up nearly 8% from 39 cents. Shares yielded 2.3% late last week…For the second time this year,JPMorgan Chase(JPM) is raising its payout, this time by 12%, to 56 cents a share. Yield: 2.4%. In March, the bank hiked its dividend from 48 to 50 cents…US Bancorp(USB) is raising its quarterly to 30 cents a share, up 7%. Yield: 2.2%…Fifth Third Bancorp(FITB) is hiking its quarterly payout 14.3%, to 16 cents a share from 14 cents. Yield: 2.3%.
Email:lawrence.strauss@barrons.com
Follow@lawlcs
Consumer-discretionary stocks are more volatile and lower-yielding than staples shares.
By
LAWRENCE C. STRAUSS
September 25, 2017
Getty Images
In search of solid dividend ideas, this column has been working its way across the Standard & Poor’s 500’s 11 sectors.
The latest stop is consumer-discretionary stocks, which recently were yielding a modest 1.46%. That’s well below the Standard & Poor’s 500’s average of about 2% and surpasses only technology at 1.33%.
Still, as the table below shows, there are consumer-discretionary companies that do yield more than 2%.Barron’salso looked for companies with market capitalizations above $15 billion, forward price/earnings ratios below 15 times, and payout ratios below 50%.
The consumer-discretionary issues in the S&P 500 have returned about 10% this year, some two percentage points behind the broader index.
For income-seeking investors, the sector has drawbacks besides the lower yields. For example, with retailing stocks, one part of the consumer-discretionary group, “you have to be very cautious about the Amazon effect,” says John Gomez, president of Santa Barbara Asset Management. The firm advises the $3 billionNuveen Santa Barbara Dividend Growthfund (NSBRX).
Another concern: Discretionary names can be more volatile than consumer-staples shares. In bad times, observes Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, “they decline more.” However, he notes, they often have stronger rebounds.
In 2008—prime time for the financial crisis—S&P 500 consumer-discretionary shares plummeted by 34.7%, versus a 17.7% decline for staples companies. In the following year, the stocks of discretionary companies gained 38.8%, on average, far more than staples’ 11.2%.
But during 2008 and 2009, discretionary stocks had a lot more dividend cuts than their staples counterparts did.
One of the Santa Barbara fund’s consumer-discretionary holdings isGeneral Motors(GM), which, Gomez maintains, can boost its dividend at a high-single-digit clip over the next few years. The auto maker’s payout is expected to be flattish this year, but the company “opted for a share buyback of approximately 10% of its float,” notes Gomez, adding that its “payout ratio is still very reasonable at 25%.”
IN OTHER NEWS,Microsoft(MSFT) declared a quarterly dividend of 42 cents a share, up nearly 8% from 39 cents. Shares yielded 2.3% late last week…For the second time this year,JPMorgan Chase(JPM) is raising its payout, this time by 12%, to 56 cents a share. Yield: 2.4%. In March, the bank hiked its dividend from 48 to 50 cents…US Bancorp(USB) is raising its quarterly to 30 cents a share, up 7%. Yield: 2.2%…Fifth Third Bancorp(FITB) is hiking its quarterly payout 14.3%, to 16 cents a share from 14 cents. Yield: 2.3%.
Email:lawrence.strauss@barrons.com
Follow@lawlcs
