High Yielding Investors Had to Reaffirm Objectives in 2017

In August we highlighted in our commentary “Investors Can’t Have Their Cake and Income Too.” ( https://acmwealth.com/article-video/investors-cant-have-their-cake-and-income-too/) that higher yielding equities were not participating in the impressive market move. Many yielding stocks at the time were providing a negative year-to-date return while their income remained constant. It was a reminder to the income investor that when their primary objective is cash flow and not appreciation, they would sometimes have to look the other way while growth was riding high. 2017 proved to be a year when income investors weren’t able to have their growth (cake) and income too.

First a look at the S&P 500 Index (as represented by SPY)* which ended the year with an impressive 21.76% total return. Growth investors gave up yield (S&P 500 yield 1.29%) for appreciation. The technology sector contributed 8.51% towards the 21.76% total return. If we go further into the weeds; Apple, Microsoft, Amazon, Facebook, Google, and Boeing contributed 5.50% or a quarter of the S&P 500’s return. There are not many high yielding stocks coming out of the technology sector and other than Boeing’s 2.32% yield, the big six stocks listed above would not be on most income investor’s buy lists.

So how did higher yielding stocks of the S&P 500 do in 2017? Taking the 20 highest yielding S&P 500 stocks and creating an equally weighted portfolio, the group’s yield was approximately 6% on the last day of the year. Here you will find companies like Macy’s, Mattell, Ford, GE, and Costco just to name a few. This group was down 6.30% for the year. Clearly out of favor while growth prevailed.

Building a portfolio of the highest yielding companies in the S&P 500 for income is not a plan for success. But as an exercise it helps to illustrate a number of points. A) Weighted indices like the S&P 500 may not represent the broader market or your personal objectives. B) High yielding stocks have different risks than growth stocks and can be out of favor when momentum is in favor. C) Investors searching for yield can’t expect to have S&P 500 growth when yield is their desire.

If you are more comfortable relying on yield for the bulk of your income needs then you may have to continue to give up the type of appreciation that this market is currently affording growth investors. Income investors must review their objectives and risk tolerances. It would not be wise to chase returns for your distributions needs but it might make sense to pursue a total return strategy which relies on both yield and price appreciation to meet your annual distribution goals. Consult with your advisor.

*S&P 500 Index represented by SPDR S&P 500 (SPY) ETF.

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