Beware, Income Investors

Beware, Income Investors
Consumer-discretionary stocks are more volatile and lower-yielding than staples shares.

By
LAWRENCE C. STRAUSS
September 25, 2017


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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

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Consumer staples is the least volatile best performing sector over the long haul.

 

It was in the past, before everyone bought into the 'low vol' meme. In the future... we'll see.

 

When exactly did everyone buy into the low vol meme? And how has it impacted consumer staple stocks?

 

Over the past 2- 3 years. Where have you been? There are a zillion new low-vol products.

 

The yellow flag being put up by some is that "low-vol" trade (long consumer cyclical and/or staple) is very crowded and a lot of the investors who are long are not going to take it well when any vol hits the sector.

 

Funny that I trade consumer staples with my own wrinkle to it for 18%+ annual return the past 3 years. Good thing I didn't realize they are passe.