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.
"We like to focus on capital appreciation and we're looking at companies that can grow dividends, not just ones that have been doing it for the past 25 years," Thompson added.
Financial stocks, which have been bid-up post the election, still represent meaningful value, Thompson said, despite being overbought in the short run.
Goldman Sachs seems to be a particular beneficiary of the Trump administration, something that Thompson called "a good thing," despite cries from some of his electorate base that it's more of the same in Washington.
Gary Cohn, formerly Goldman Sachs's COO and president, was nominated by Trump to be the Direct of the National Economic Council. In an early December statement, President-elect Trump said Cohn will be responsible for helping "craft economic policies that will grow wages for our workers, stop the exodus of jobs overseas and create many great new opportunities for Americans who have been struggling."
Trump's pick for Secretary of the Treasury, Steve Mnuchin, is also a Goldman Sachs alum, having worked at the investment bank in the mortgage bond department, before leaving in 2002 to invest and found a number of hedge funds, as well as becoming Chairman and CEO of OneWest Bank (the former IndyMac), prior to selling it to CIT Group (CIT) .
J.P. Morgan CEO Jamie Dimon was also mentioned as a possible nominee for Treasury Secretary, but Thompson said his departure would not affect her thoughts on the New York-based investment bank.
In addition, Thompson has been buying the Financial Select Sector SPDR Fund ETF (XLF) as a way to get broad exposure to the space.