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|  | OCTOBER 27, 2004
 SAM STOVALL'S SECTOR WATCH By Sam Stovall Digging for Cash-Paying Nuggets Large-cap S&P 1500 stocks in the financial and energy sectors should continue to reap the favorable dividend tax rate It's time for investors to start thinking beyond Nov. 2. If the Republicans maintain their White House hold -- or if the Democrats win and decide not to raise the dividend tax rate back to that of ordinary income -- where would an investor find the highest dividend yields within the S&P Composite 1500 Index (which consists of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes)? The answer appears to be larger-cap issues with low price-to- book value ratios in the financial, materials, or utilities sectors. The tables below show the weighted-average dividend yield, the percentage of companies paying a dividend, and the highest-yielding issue within each component index, as well as the growth and value subindexes of each (based on price-to-book value), and the 10 Global Industry Classifications Standard sectors.
One thing is apparent: A greater share of companies in the S&P 500 pay a dividend -- 75% -- than in either the MidCap 400 (56%) and SmallCap 600 (44%) indexes. And the 500 boasts a higher average yield of 1.8%, vs. 1.2% for the 400 and 0.9% for the 600. In addition, we see in all three cases that the value component of the broad benchmark pays a higher yield than the growth component. And finally, the financials, materials, and utilities sectors consistently pay yields in excess of their respective overall benchmarks. Other high-paying sectors include the large-cap telecom-services sector, which is dominated by the high-yielding regional Bell operating companies, the large-cap energy stocks, dominated by ExxonMobil (XOM ; S&P rank 5 STARS, buy; recent price, $49), which pays a 2.2% yield, and the large- and small-cap consumer-staples issues. All sectors in all cap sizes have companies that pay a dividend, except the small-cap telecommunications-services sector. The highest-yielding company in the S&P 1500 is Citizens Communications (CZN ; 4 STARS, accumulate; $13) at 7.4%. Digging a little bit deeper than the benchmark and sector levels, we see that the highest-yielding industries are also fairly consistent: real estate investment trusts, also known as REITs, in the 500, 400, and 600, either gas or electric utilities in all three benchmarks, tobacco in the 500 and 600, insurance brokers in the 500, and commodity chemicals in the 400.
In general, we believe a company offering a healthy dividend yield pays investors while they wait for a rising share price (which is also taxed at a more favorable rate than ordinary income) and implies that management is confident earnings will remain or grow sufficiently to cover this dividend. Obviously, not all high-yielding companies are worth buying. Indeed, S&P has several companies with unfavorable STARS rankings that offer very high yields. Below is a list of the top-10 yielding stocks in the S&P STARS universe that have 2 STARS (avoid) or 1 STARS (sell) recommendations by S&P analysts.
Industry Momentum List Update For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) and their proxies (the highest STARS-ranked companies in the subindustry index; tie goes to the largest market value) as of Oct. 22, 2004:
Required Disclosures Standard & Poor's Stock Appreciation Ranking System (STARS) 5-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Accumulate): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate that of the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Avoid): Total return is expected to underperform the total return of the S&P 500 Index, and share price is not anticipated to show a gain. 1-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis. As of September 30, 2004, SPIAS and their U.S. research analysts have recommended 29.2% of issuers with buy recommendations, 58.5% with hold recommendations and 12.3% with sell recommendations. All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Additional information is available upon request to Standard & Poor's. Other Disclosures This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS. Disclaimers This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.  Stovall is chief investment strategist for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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