The average dividend yield on S&P 500 stocks has approximately halved to 2% over time. While significant inflows to these stocks have caused their yields to drop, the total returns from dividend stocks still compare favorably with yields on Treasuries. In other words, when total returns are calculated, which includes growth in profit, the comparison is favorable. The trick is to select higher-than-average dividend yielding stocks and discard those with mediocre performance.
In order to identify popular dividend paying stocks, we went through the top 10 holdings of three fund managers as of the most recently available date. Specifically, we checked the top 10 stocks of three dividend-oriented large cap funds, namely Fidelity Equity Dividend Income Fund (FEQTX), T. Rowe Price Equity Income Fund (PRFDX) and Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX).
The results surprised us a bit as they included several names outside the usual realm of utilities and pharmaceuticals. Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), General Electric Company (GE) and Johnson & Johnson (JNJ) found a place in the top 10 holdings of all three mutual funds. In addition, Wells Fargo & Company (WFC) was included in the top 10 of Fidelity and T. Rowe Price.
Exxon Mobil Corporation is well known as the world’s largest publicly traded oil company. Approximately 83% of Exxon’s earnings come from its operations outside the U.S. Exxon Mobil has long been a core holding for investors seeking a defensive name with continued dividend growth. We maintain our Neutral recommendation on Exxon Mobil following its third quarter 2012 report. The stock provided a dividend yield of 2.65%. It had a forward P/E multiple of 10.9 versus 7.7 average for the industry.
Chevron Corporation is one of the largest oil and gas companies in the world, based on proven reserves. Chevron’s current oil and gas development project pipeline is among the best in the industry. We see the stock performing in line with the broader market and maintain our Neutral recommendation. Prior to the announcement of its third quarter results, the stock gave a dividend yield of 3.13%. It had a forward P/E of 8.9 compared with 8.5 for the industry.
General Electric Company is one of the largest and the most diversified technology and financial service corporations in the world. More than 50% of GE’s revenue is generated from emerging markets. The company generates huge free cash flow. We maintain our Neutral recommendation on General Electric. Prior to the announcement of its third quarter results, the stock provided a dividend yield of 3.01%. The stock had a forward P/E of 14.5 versus 16.1 for the industry.
Johnson & Johnson’s worldwide business is segregated into three segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics. For the full year 2011, these segments contributed 23%, 37% and 40% respectively to the company’s revenue. Johnson & Johnson recently struck several deals which should boost the company’s top line. There are many candidates in final stages of development which hold strong potential. Emerging markets recorded 13% growth in 2011. Based on third quarter results, we maintain our Neutral rating on the stock. The stock recently had a dividend yield of 3.44%. Johnson & Johnson had a forward P/E of 13.9 compared with 14.2 for the industry.
Wells Fargo & Company is one of the largest financial services companies in the U.S. (in terms of assets) with $1.3 trillion in assets and over $928 billion in deposits. The company provides banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance. Higher non-interest income along with cost control measures acted as positives for the latest quarter. After reviewing the third quarter results, we maintain our Neutral recommendation on the shares. The stock provided a dividend yield of 2.57%. The stock had a forward P/E of 10.3 versus 12.1 for the industry.
Barring Exxon Mobil and Chevron Corporation which are more expensive on a forward P/E basis, the other three widely held dividend stocks are cheaper than the industry average. This suggests that the timing may still be favorable for taking long positions on select large cap dividend paying stocks.
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