Financial Insights

Investors Can’t Have Their Cake And Income Too

Some equity income investors are feeling a bit dejected this year as they continue to watch the S&P 500 growth ship sail without them. These investors must remember that their primary objective is cash flow from dividends. And so far this year, the growth of the S&P 500 is not being fueled by the high yield stocks. Using the S&P 500 ETF (SPY) as our metaphoric party boat, it has caught a nice breeze with a 11.55% YTD return (through July 31, 2017) while the S&P’s higher yielding stocks are barely floating or underwater.

Looking a little deeper amazingly six stocks (Apple, Google, Facebook, Amazon, Microsoft and Johnson & Johnson) make up one third of this year’s SPY return. Even more impressive is that 4.6% of SPY’s return thus far is coming from the technology sector alone. Again, not a place to go fishing for yield.

So how are yielding stocks doing right now? If we take the 20 highest yielding S&P 500 stocks and create an equally weighted portfolio, the group would be yielding approximately 5.98%. Here you will find companies like AT&T (5%), Verizon (4.7%), Ford (5.7%), Occidental Petroleum (4.9%), Macy’s (6.3%), Mattel (7.5%), Iron Mountain (5.8%) and Costco (5.5%) just to name a few. This group is down -6.5% YTD.

Clearly just selecting the highest yielding companies for income is not a plan for success. But this exercise helps to illustrate a number of points.  A) Weighted indices may not represent the broader market or your objectives. B) High yielding stocks have different risks than growth stocks. C) Investors searching for income can’t expect to have S&P 500 growth that is being fueled by technology.

For many income investors a dependence on market appreciation for cash flow is something they are just not willing to fully accept. So if the technology sector continues to motor this market forward, income investors must review their objectives and risk tolerances. If income is your primary concern then you cannot expect the growth of this current market. At least not from your income stocks.


Disclosure:  The SPDR S&P 500 ETF (SPY) was used for the S&P 500 Index portfolio measurements in this commentary as of July 31, 2017. The S&P 500 index does not have fees. Past performance is not a guarantee of future results. ACM’s income with growth strategy generates income from dividends and interest which is subject to market risk and is not guaranteed. Growth of income is not guaranteed. Investors can lose principal and should review long term performance results and risk with a financial advisor before making any investment decision. Diversification does not ensure a profit or guarantee against a loss. ACM’s ADV Part 2A and 2B are available upon request. ACM is an investment advisory firm.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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