As a result of the stronger-than-expected jobs report, investors seemed to accelerate their own timetable as to when the Fed will begin raising rates, as witnessed by the decline in higher yielding asset classes. Specifically, while the S&P 500 slipped 0.34% on Friday, U.S REITs fell 2.9%, while the Barclays 20+ Year Treasury Index slumped nearly 1.8%, and the shorter duration Barclays Aggregate Index declined less than 0.6%. On a sub-industry level within the S&P 500, high dividend yields also acted like an anchor, dragging down returns. Those S&P 500 sub-industries in the highest third by dividend yield (which averaged 3.4%) lost an average 0.8% in price, versus a decline of 0.1% for stocks in the middle third (averaging a 1.8% yield) and a flat performance for those stocks in the bottom third (yielding an average 0.7%). Indeed, nine of the 10 worst-performing S&P 500 sub-industries, which dropped between 2.9% and 4.4%, yielded more than the S&P 500.
The conclusion of this one-day performance for high yielding investments implies that when the U.S. Federal Reserve does finally start raising its benchmark fed funds rate in June, don’t be surprised to see the long-term, high-yielding outperformers finally take it on the chin. That doesn’t necessarily mean that investors should start bailing out of these issues. However, we at S&P Capital IQ advise investors to be choosy when searching for higher-yielding issues. Using S&P’s MarketScope Advisor’s stock screening tool, I found 10 U.S. stocks that 1) offered a yield of 2% or more, 2) were ranked “Buy” or “Strong Buy” by S&P Capital IQ equity analysts, 3) had a beta of 1.0 or less, showing a lower price volatility than the market as a whole, and 4) had earned an S&P Quality Ranking of A-, A or A+, demonstrating an above-average consistency of raising earnings and dividends in each of the past 10 years.
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