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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 last year, the risky services stocks with low dividend yields 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. As we are concerned about the Fed's loose monetary policy, we think investors should pick defensive stocks with high dividend yields in order to protect themselves against inflation.

We compiled a list of the top 30 S&P 500 Services Stocks (The sector classifications are sourced from Finviz and the market data are sourced from Fidelity) by market cap and ranked them based on their annualized dividend yields. The top and bottom halves and their performances are shown below.

HIGHER DIVIDEND YIELDS Dividend Yield YTD Return 52-Week Return
The Home Depot Inc. HD 3.25% -11.05% 10.38%
United Parcel Service Inc. UPS 3.17% -8.22% 0.21%
Carnival Corp. CCL 3.10% -29.31% -8.57%
Time Warner Inc. TWX 2.96% -0.06% -0.84%
Wal-Mart Stores Inc. WMT 2.87% -4.42% 0.99%
McDonald's Corp. MCD 2.87% 12.58% 24.55%
Time Warner Cable Inc. TWC 2.82% 4.36% 19.74%
Lowe's Companies LOW 2.78% -18.45% -0.89%
Norfolk Southern Corp. NSC 2.49% 12.10% 22.31%
Target Corp. TGT 2.47% -18.32% -6.19%
Walgreen Co. WAG 2.43% -4.19% 33.92%
Viacom Inc. VIA-B 2.23% 14.41% 35.66%
CSX Corp. CSX 2.18% 2.86% 22.87%
Comcast Corporation CMCSA 2.06% 0.92% 17.70%
Union Pacific Corp. UNP 2.05% 0.68% 21.38%
AVERAGE -3.07% 12.88%

LOWER DIVIDEND YIELDS Dividend Yield YTD Return 52-Week Return
Yum! Brands Inc. YUM 1.97% 4.90% 21.96%
Accenture plc ACN 1.57% 18.94% 45.72%
CVS Caremark Corp. CVS 1.46% -0.76% 14.91%
Starbucks Corp. SBUX 1.42% 15.15% 47.59%
Costco Wholesale Corp. COST 1.25% 7.22% 37.58%
Walt Disney Co. DIS 1.14% -6.21% 1.68%
News Corp. NWSA 1.02% 1.17% 3.24%
Visa Inc. V 0.72% 18.97% 17.55%
FedEx Corp. FDX 0.63% -11.19% -3.40%
Mastercard Inc. MA 0.18% 45.95% 62.34%
Amazon.com Inc. AMZN 0.00% 12.61% 58.57%
eBay Inc. EBAY 0.00% 5.28% 39.06%
DIRECTV DTV 0.00% 13.67% 16.98%
priceline.com Inc. PCLN 0.00% 32.10% 80.34%
MedcoHealth Solutions Inc. MHS 0.00% -9.45% 17.34%
AVERAGE 9.89% 30.76%

In the last 52-week period, the average return of the high dividend yielding Services stocks was 12.88%. The second group of 15 stocks with lower dividend yields performed much better in the same period, returning 30.76% on average. Low dividend stocks also outperformed high dividend stocks in 2011. The average YTD return of the first group was -3.07% vs. 9.89% 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.

Here are the top 10 S&P 500 Services stocks with the highest dividend yields:

  1. The Home Depot Inc. (NYSE:HD): The Home Depot Inc. is a large home improvement specialty retailer. HD has a 3.25% dividend yield and gained 10.38% during the past 12 months. HD performed negatively in 2011, losing -11.05% year-to-date. The stock has a market cap of $48.95B and P/E Ratio of 14.71. Ralph V. Whitworth's Relational Investors holds more than $400 million of HD. Jean-Marie Eveillard and Ken Griffin are also among HD investors. (See Ken Griffin's top stock picks here)
  2. United Parcel Service Inc. (NYSE:UPS): United Parcel Service Inc. is a package delivery company operating worldwide. UPS has a 3.17% dividend yield and returned 0.21% during the past 12 months. UPS performed negatively since the beginning of this year, losing -8.22% year-to-date. The stock has a market cap of $64.43B and P/E Ratio of 16.22. Jason Capello's Merchants' Gate Capital and Jeffrey Vinik's Vinik Asset Management are prominent UPS investors.
  3. Carnival Corp. (NYSE:CCL): Carnival Corp. is a global company that operates cruise ships and provides vacation services to its clients. CCL has a 3.10% dividend yield but lost -8.57% during the past 12 months. CCL also performed negatively since the beginning of this year, losing -29.31% year-to-date. The stock has a market cap of $19.60B and P/E Ratio of 13.54. Harris Associates had more than $250 Million in CCL at the end of March 2011.
  4. Time Warner Inc. (NYSE:TWX): Time Warner Inc. is a leading media and entertainment company in the world. TWX has a 2.96% dividend yield but lost -0.84% during the past 12 months. TWX recently traded at $31.74 and returned -0.06% since the beginning of the year. The stock has a market cap of $33.16B and P/E Ratio of 13.68. Ken Fisher holds the largest TWX position among the 300-plus funds we are tracking. (See Ken Fisher's favorite stocks here)
  5. Wal-Mart Stores Inc. (NYSE:WMT): Wal-Mart Stores Inc. is a global company operating retail store chains worldwide. WMT has a 2.87% dividend yield and returned 0.99% during the past 12 months. WMT performed negatively since the beginning of this year, losing -4.42% year-to-date. The stock has a market cap of $176.58B and P/E Ratio of 11.80. Warren Buffett holds more than $2 Billion in WMT.
  6. McDonald's Corp. (NYSE:MCD): McDonald's Corp. is a large fast-food chain operating worldwide. MCD has a 2.87% dividend yield and returned 24.55% during the past 12 months. MCD also performed well since the beginning of this year, gaining 12.58% year-to-date. The stock has a market cap of $87.78B and P/E Ratio of 17.19. Both Peter J. Eichler Jr. and James Crichton hold more than $150 Million of MCD. Ric Dillon and Jim Simons are also among MCD investors.
  7. Time Warner Cable Inc. (NYSE:TWC): Time Warner Cable Inc. is a large cable TV company broadcasting in the United States. TWC has a 2.82% dividend yield and returned 19.74% during the past 12 months. TWC recently traded at $68.00 and returned 4.36% since the beginning of this year. The stock has a market cap of $22.11B and P/E Ratio of 15.96. Andreas Halvorsen's Viking Global invested more than $500 Million in TWC.
  8. Lowe's Companies (NYSE:LOW): Lowe's Companies is a large home improvement store chain operating primarily in the United States, Canada and Mexico. LOW has a 2.78% dividend yield but lost -0.89% during the past 12 months. LOW performed negatively since the beginning of this year, losing -18.45% year-to-date. The stock has a market cap of $26.24B and P/E Ratio of 14.19. Jason Capello, Jonathan Jacobson and Ken Griffin are prominent LOW investors.
  9. Norfolk Southern Corp. (NYSE:NSC): Norfolk Southern Corp. is a US company providing railway shipping and transportation primarily in the United States. NSC has a 2.49% dividend yield and gained 22.31% during the past 12 months. NSC recently traded at $69.19 and returned 12.10% year-to-date. The stock has a market cap of $24.06B and P/E Ratio of 14.60. Ken Fisher had more than $150 Million in NSC at the end of March.
  10. Target Corp. (NYSE:TGT): Target Corp. is a US company operating retail store chains in the United States. TGT has a 2.47% dividend yield but lost -6.19% during the past 12 months. TGT also performed negatively since the beginning of this year, losing -18.32% year-to-date. The stock has a market cap of $33.53B and P/E Ratio of 11.87. Jim Simons holds the largest TGT position among 300+ funds we are tracking (check out Jim Simons' other large positions).

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-Yield Services Stocks?