Digging for Cash-Paying Nuggets


By Sam Stovall 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.

S&P 500

Sectors & Benchmarks

Yield

% of Cos.

Highest Yielder

Consumer Discretionary

1.00%

84%

General Motors GM

Consumer Staples

2.20%

92%

Altria MO

Energy

2.00%

85%

Kinder Morgan KMI

Financials

2.60%

98%

Equity Office Properties EOP

Health Care

1.60%

56%

Merck MRK

Industrials

1.80%

88%

Deluxe Corp. DLX

Information Technology

0.50%

29%

Hewlett-Packard HPQ

Materials

2.20%

91%

Eastman Chemical EMN

Telecommunication Services

3.20%

73%

Citizens Comm. CZN

Utilities

3.70%

82%

TECO Energy TE

S&P 500 Index

1.80%

75%

Citizens Comm. CZN

S&P 500 Index (Growth)

1.50%

71%

Altria MO

S&P 500 Index (Value)

2.10%

77%

Citizens Comm. CZN

S&P MIDCAP 400

Sectors & Benchmarks

Yield

% of Cos.

Highest Yielder

Consumer Discretionary

0.70%

61%

Tupperware TUP

Consumer Staples

0.90%

67%

Universal Corp. UVV

Energy

0.40%

48%

Tidewater TDW

Financials

2.50%

92%

New Plan Excel Realty NXL

Health Care

0.20%

19%

Hillenbrand HB

Industrials

0.80%

58%

Tecumseh Prods. TECUA

Information Technology

0.20%

18%

Reynolds & Reynolds REY

Materials

1.90%

84%

Olin Corp. OLN

Telecommunication Services

0.70%

50%

Telephone & Data Sys. TDS

Utilities

3.60%

90%

Great Plains Energy GXP

S&P MidCap 400 Index

1.20%

56%

Tidewater NXL

S&P MidCap 400 Index (Growth)

0.70%

48%

United Dominion Realty UDR

S&P MidCap 400 Index (Value)

1.60%

64%

New Plan Excel Realty NXL

S&P SMALLCAP 600

Sectors & Benchmarks

Yield

% of Cos.

Highest Yielder

Consumer Discretionary

0.60%

45%

Russ Berrie RUS

Consumer Staples

1.10%

60%

Dimon DMN

Energy

0.20%

22%

Frontier Oil FTO

Financials

2.40%

83%

Comml. Net Lease Realty NNN

Health Care

0.20%

24%

Mentor MNT

Industrials

0.70%

51%

Standard Register SR

Information Technology

0.20%

15%

StarTek SRT

Materials

1.10%

63%

Quaker Chemical KWR

Telecommunication Services

--

NA

NA

Utilities

3.50%

81%

Allete ALE

S&P SmallCap 600 Index

0.90%

44%

Allete ALE

S&P SmallCap 600 Index (Growth)

0.50%

36%

StarTek SRT

S&P SmallCap 600 Index (Value)

1.30%

49%

Allete ALE

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.

HIGHEST-YIELDING INDUSTRIES

Industry

Yield

Index

Tobacco

6.0%

500

REITs

5.7%

400

REITs

5.3%

500

Tobacco

5.1%

600

REITs

5.1%

600

Electric Utilities

4.9%

600

Insurance Brokers

4.7%

500

Gas Utilities

4.6%

500

Gas Utilities

4.2%

400

Commodity Chemicals

4.1%

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.

HIGH-YIELD STOCKS TO AVOID

Company Name

Ticker

STARS Rank

Yield %

Recent Price

China Unicom ADS

CHU

2

9.1

$7

Equity Office Properties Tr

EOP

2

7

$28

Apartment Investment & Mgmt'

AIV

2

6.8

$36

Gables Residential Trust

GBP

2

6.7

$36

Brandywine Rlty Trust SBI

BDN

2

6.1

$29

CarrAmerica Realty

CRE

2

6

$32

Mack-Cali Realty

CLI

2

5.7

$43

Post Properties

PPS

2

5.7

$32

Duquesne Light Holdings

DQE

2

5.6

$18

Duke Realty

DRE

2

5.5

$33

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:

Industry

Company

Ticker

STARS

Price

Commodity Chemicals

Lyondell Chemical

LYO

3

$23

Consumer Electronics

Harman International

HAR

3

$106

Diversified Metals & Mining

Peabody Energy

BTU

4

$66

Fertilizers & Agricultural Chemicals

Scott's Co.

SMG

4

$62

Internet Retail

EBay

EBAY

4

$96

Internet Software & Services

Yahoo!

YHOO

4

$35

Oil & Gas Drilling

Nabors Industries

NBR

5

$50

Oil & Gas Equipment & Services

BJ Services

BJS

5

$52

Oil & Gas Exploration & Production

Apache

APA

5

$53

Oil & Gas Refining & Marketing & Transportation

Premcor

PCO

4

$43

Steel

Nucor

NUE

3

$40

Wireless Telecommunication Services

Nextel Partners

NXTP

5

$17

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


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