Combining Dividend Yields And Buybacks To Prioritize S&P Sectors

by: Simon Moore, CFA

If you focus on yields within the S&P 500 you can tend to end up owning various telecom and utility stocks. But this ignores stock buybacks which are larger than dividends for all sectors, apart from telecoms and utilities. By looking at dividends and buybacks in combination utilities and telecoms appear much less attractive and consumer stocks ultimately perform best in terms of returning cash to shareholders across both yield and buybacks.

If you look at dividend yield alone across the different sectors of the S&P 500, you get this fairly familiar picture:

S&P 500 Sector Current dividend yield
Consumer Discretionary 1.29%
Consumer Staples 2.68%
Healthcare 1.87%
Financials 2.41%
Industrials 1.95%
Informational Technology 0.91%
Energy 1.52%
Utilities 3.62%
Telecommunications Services 3.81%
Materials 1.91%

Based on the above, utilities and telecoms stand out as good sectors for investors with yields approaching 4%, and IT in particular looks like one to avoid at under 1%.

However, based on S&P data, we can look at buybacks over the past 12 months (up to 9/2011) and the picture is quite different. The high yielding sectors within the S&P 500 such as utilities and telecoms tend to do significantly less buybacks and some of the low dividend sectors such as IT do significant buybacks.

S&P 500 Sector Buybacks over past 12 months as a % of total sector market cap
Consumer Discretionary 5.73%
Consumer Staples 4.08%
Healthcare 4.04%
Financials 2.86%
Industrials 3.22%
Informational Technology 4.02%
Energy 3.05%
Utilities 0.58%
Telecommunications Services 0.20%
Materials 2.04%

So what's the combination of the above two datasets? Does it end up balancing out across dividends and buybacks?

S&P 500 Sector Dividend Yield + 12 month buybacks
Consumer Discretionary 7.02%
Consumer Staples 6.76%
Healthcare 5.91%
Financials 5.27%
Industrials 5.17%
Informational Technology 4.93%
Energy 4.57%
Utilities 4.20%
Telecommunications Services 4.01%
Materials 3.95%

No, interestingly utilities and telecoms are now towards the bottom of the list when buybacks and dividends are considered jointly, they may have relatively high yields but buybacks are relatively tiny. The best sectors in terms of returning cash to shareholders through both dividends and buybacks are consumer discretionary and consumer staples.


Dividends and buybacks are just part of the investment story for a sector and say nothing about future growth for the sector. Also, buybacks are discretionary and can change faster than dividends. Also, consider the different tax treatments of buybacks and dividends.


Given the favorable combined yield and buyback characteristics of consumer discretionary (NYSEARCA:VCR) and staples stocks (NYSEARCA:VDC), ensure you have significant exposure to these sectors within your portfolio. Be cautious on utilities (NYSEARCA:VPU) and telecoms (NYSEARCA:VOX), the apparently high dividend yields aren't giving you the full picture, because these stocks lag significantly on buybacks and aren't as shareholder friendly relative to other sectors as they appear.

Disclosure: I am long VFH.