Investors will often talk about high-yielding dividends as a way to supplement their Social Security, 401(k)s and other forms of retirement funds. But as great as high yield sounds, it's not all it's cracked up to be when you dig a little deeper.
"Companies that can grow their dividends are cheaper than high-yielding companies, like consumer staples, telecom and utilities," said Leslie Thompson, managing principal at Spectrum Management Group. "We like companies that have the ability and willingness to grow their dividends over time and from a total return and income perspective, you'll generate better returns over time."
Over the summer, companies with high dividend payouts in the aforementioned groups were bid up by investors in the search for yield, leaving them with higher than normal earnings multiples. As measured by Fidelity, consumer staples have a P/E multiple of 22.85, though that's down from the highs seen in July. The same goes for telecommunications (20.7) and utilities, which currently has a P/E multiple of just over 15.
Even though companies in these sectors aren't traditionally thought of as high-growth names, investors were willing to stretch for yield, aided by the low interest rate environment. Yields on the 10-Year U.S. Treasury reached a low of 1.37% in early July, but since then, they've rebounded sharply, particularly after Donald Trump's election win and signs of a strengthening economy.
With yields approaching 2.6% on the 10-year U.S. Treasury, Thompson and her Indianapolis-based firm have been looking in different sectors for clients that will do well in a strong dollar environment, such as those in the technology and financial sectors.