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Recently, we argued that defensive investing with high dividend yielding Industrials may be a better strategy for the near future. Although defensive investing in some sectors doesn’t usually bring in the best returns in bull markets, investing with a margin of safety can be highly valuable in down markets.

The same strategy can be applied to other sectors, such as the Services sector. Since August, the risky services stocks with low dividend yields may have performed better than the defensive services stocks with high dividend yields. However, defensive stocks are generally safer and provide better protection in down markets.

We believe investors should be cautious about the upcoming inflationary environment. Like Jim Rogers and Ray Dalio, we are concerned about the Fed’s inflationary monetary policy, and we think investors should pick defensive stocks with high dividend yields in order to protect themselves against inflation.

We compiled a list of top 30 U.S. Services stocks (the sector classifications are sourced from Finviz) by market cap and ranked them based on their 12-month dividend yields. The top and bottom halves and their performances are shown below:

HIGHER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-week Return

McDonald's Corp

MCD

2.9%

3.68%

14.09%

United Parcel Service

UPS

2.6%

4.19%

9.22%

The Home Depot

HD

2.6%

7.27%

7.30%

Time Warner Inc.

TWX

2.4%

18.02%

14.47%

Wal-Mart Stores

WMT

2.3%

3.57%

5.72%

Time Warner Cable Inc.

TWC

2.2%

16.53%

37.11%

Norfolk Southern Corp.

NSC

2.0%

19.59%

25.08%

Target Corp.

TGT

1.9%

-17.84%

-12.23%

Yum! Brands Inc.

YUM

1.8%

11.14%

27.89%

Lowe's Companies Inc.

LOW

1.7%

4.74%

-4.26%

Walgreen Co.

WAG

1.5%

11.13%

23.41%

Comcast Corp.

CMCSA

1.5%

22.18%

33.05%

Carnival Corp.

CCL

1.4%

-15.37%

-7.26%

Union Pacific Corp.

UNP

1.4%

12.53%

36.69%

CSX Corp.

CSX

1.3%

21.06%

37.95%

Average

8.16%

16.55%


LOWER DIVIDEND YIELDS

Dividend Yield

YTD Return

52-week Return

CVS Caremark Corp.

CVS

1.2%

5.76%

-0.27%

Starbucks Corp.

SBUX

1.1%

13.44%

35.35%

Costco Wholesale Corp.

COST

1.0%

11.80%

37.53%

Walt Disney Co.

DIS

0.9%

14.82%

15.94%

Viacom Inc.

VIA.B

0.9%

28.25%

42.07%

News Corp.

NWSA

0.9%

20.83%

10.33%

Visa Inc.

V

0.7%

13.90%

-9.74%

FedEx Corp.

FDX

0.5%

1.44%

2.48%

Mastercard Incorporated

MA

0.2%

26.15%

12.92%

Amazon.com Inc.

AMZN

0.0%

10.25%

44.34%

Liberty Starz Group

LSTZA

0.0%

13.34%

33.86%

eBay Inc.

EBAY

0.0%

20.52%

40.28%

DIRECTV

DTV

0.0%

22.19%

33.23%

Las Vegas Sands Corp.

LVS

0.0%

-0.17%

78.83%

priceline.com Inc.

PCLN

0.0%

35.18%

100.72%

Average

15.85%

31.86%

In the last 52-week period, the average return of the high dividend yielding Services stocks was 16.55%. The second group of 15 stocks with lower dividend yields performed much better in the same period, returning 31.86% on average. Low dividend stocks also outperformed high dividend stocks in 2011. The average YTD return of the first group was 8.16% vs. 15.85% for the second group. As we expected, the risky Services stocks with low dividend yields have already taken advantage of the recent uptrend so far. Considering the fact that bull markets don’t last forever, however, maybe now is a good time to be more defensive and switch to high dividend yielding services stocks.

Five services stocks with the highest dividend yields are as follows:

McDonald's Corp (NYSE:MCD): McDonald’s Corp. is a large fast-food chain operating worldwide. MCD has a 2.9% dividend yield and returned 14.09% to its investors during the past 12 months. WM recently traded at $78.60 and returned 3.68% year-to-date. The stock has a market cap of $82.00B and P/E ratio of 17.16. Scout Capital, Peter Eichler’s Aletheia Research, and Jim Simons’ Renaissance had large positions in MCD at the end of December.

United Parcel Service (NYSE:UPS): United Parcel Service is a package delivery company operating worldwide. UPS recently traded at $73.96 and has a 2.6% dividend yield. UPS returned 9.22% during the past 12 months, while it gained 4.19% year-to-date. The stock has a market cap of $73.01B and P/E Ratio of 19.31. Warren Buffett, Jeffrey Vinik, and Dmitry Balyasny were among the hedge fund managers with large UPS holdings.

The Home Depot (NYSE:HD): Home Depot is a large home improvement speciality retailer. HD has a 2.6% dividend yield and gained 7.30% during the past 12 months. HD recently traded at $37.01 and returned 7.27% since the beginning of the year. The stock has a market cap of $60.03B and P/E ratio of 18.41.

Time Warner Inc. (NYSE:TWX): Time Warner Inc. is one of the largest media and entertainment companies in the world. TWX recently traded at $36.01 and has a dividend yield of 2.4%. TWX returned 14.47% during the past 12 months. The stock performed well in 2011, gaining 18.02% year-to-date. The stock has a market cap of $39.35B and P/E ratio of 16.00. Billionaire Ken Fisher had more than $250 Million in TWX at the end of 2010. Ken Fisher and Bill Miller had the largest holdings in TWX among the fund managers we follow.

Wal-Mart Stores (NYSE:WMT): Wal-Mart Stores is a global corporation that runs chains of large discount department stores and warehouse stores. WMT has a 2.3% dividend yield and traded at $55.07 recently. WMT gained 5.72% during the past 12 months, while it returned 3.57% year-to-date. The stock has a market cap of $192.26B and P/E ratio of 12.34. WMT is the largest investment of George Soros over the last three years. Warren Buffett also had nearly $2.1 billion in WMT.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Time to Rotate to High Yielding Services Stocks