The Current State Of The Dividend Universe

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Includes: XLB, XLC, XLE, XLF, XLI, XLK, XLP, XLRE, XLU, XLV, XLY
by: Robert & Sam Kovacs
Summary

Over the past months we've shared insights into our dividend investing strategy.

To create your own strategy it is important to know what your investable universe looks like.

We provide a snapshot of U.S. dividend stocks in terms of dividend yields, earnings and cashflow payout ratios.

Investors can use this information to focus their own research.

Co-written by Robert & Sam Kovacs

Introduction

In the past months, we have shared many insights into our dividend investing strategy.

Source: Authors' Image

It can be broken down into a few key points:

We understand that this might be a lot to consider. All these adjustments have the end goal of increasing dividend income down the line.

Investors need to be looking at the right data to be able to make informed decisions.

As such, in this article, we will be presenting dividend data which gives you a snapshot of the current investable dividend universe.

Defining the investable dividend universe.

We first need to define an investable universe to analyze. In the U.S. there are around 1500 stocks paying a dividend.

We will be analyzing averages and ranges for these stocks, so we will exclude all stocks with negative earnings and operating cashflow. We will also exclude those with dividends to earnings payout ratios above 300. Same for those with operating cashflows above 300. A handful of stocks on which we don't have reliable data were also excluded.

This leaves 1277 stocks in the mad-dividends.com database.

General Data

The two most regarded metrics by dividend investors are stocks' dividend yields and payout ratios. We will be analyzing the dividend yields and payout ratios of all these stocks. We will also analyze operating cashflow payout ratios, which can paint a more precise picture of the ability of stocks to pay their dividend. The dividend yields used are those on market close on the 2nd of August.

Before moving on to sector analysis, we will run through some of the statistics of all stocks:

The stock with the lowest dividend yield comes in at a measly 0.017%. While the stock with the highest dividend yield boasts a 23.8% annual yield.

But the more interesting insight comes from looking at the stock's median, average as well as decile data.

The median U.S. dividend stock yields 2.16%, while the average is slightly higher at 2.56%.

The table below sorts stocks into 10 groups of 128 companies which are below a certain dividend yield.

The decile data is as follows:

Decile

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Div Yield

0.70%

1.12%

1.46%

1.81%

2.16%

2.57%

2.97%

3.6%

4.82%

23.88%

Source: mad-dividends.com

The table should be read in the following way: 70% of stocks yield less than 2.97%. 10% of stocks yield between 3.6% and 4.82%.

We also have similar data for the earnings payout ratio (Dividends/ Net income).

The median earnings payout ratio of U.S. dividend stocks is 37% with the average being 56%. The decile data for earnings payout ratios is as follows:

Decile

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Earnings Payout

13.27

19.79

26.11

31.30

37.70

45.42

55.28

74.15

113.28

295.30

Source: mad-dividends.com

80% of dividend paying stocks in the US have a dividend payout ratio of less than 74.15%. The top decile shows that we cut off all stocks with payout ratios greater than 300%. It is important to note than only 2% of stocks have payout ratios greater than 133%.

The chart below displays all dividend stocks. The x axis measures dividend yield, while the y axis measures earnings payout ratio. As you can see most stocks are grouped below the 130% level. This gives you a good visualization of the table shown above.

Source: mad-dividends.com

To top it off, the operating cashflow payout ratio data (Dividends/ Operating Cashflow).

The median U.S dividend stock pays out 24% of their operating cashflow as dividends. The average once again comes in a bit higher at 32.8% payout.

The decile data is as follows:

Decile

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cashflow Payout Ratio

7.22

12.38

16.71

20.92

24.87

29.32

35.94

44.18

65.82

133.20

Source: mad-dividends.com

You will note something quite interesting. There are only 10% of stocks which pay out more than 65% of their operating cashflow.

The scatterplot also reveals some other interesting elements:

Source: mad-dividends

You'll note that while there is a correlation between payout ratios and dividend yield between 0-2% yields, that correlation quickly fades, with the vast majority of stocks paying out less than 100% of their operating cashflow.

Sector data

The above data will give you a broad idea of the distribution of dividend stocks in terms of dividend yield, earnings and cash payout ratios.

But are there differences among sectors?

When analyzing stock prices we use the SPDR select sector ETFs as proxies for sectors. The dividend data represents the distribution of many of the following funds' constituents:

  • Consumer Discretionary Select Sector SPDR Fund (XLY)
  • Consumer Staples Select Sector SPDR Fund (XLP)
  • Energy Select Sector SPDR Fund (XLE)
  • Financials Select SPDR Fund (XLF)
  • Materials Select SPDR Fund (XLB)
  • Technology Select SPDR Fund (XLK)
  • Real Estate Select SPDR Fund (XLRE)
  • Industrials Select SPDR Fund (XLI)
  • Communication Services Select SPDR Fund (XLC)
  • Utilities Select SPDR Fund (XLU)
  • Healthcare Select SPDR Fund (XLV)

The first thing to note, is that some sectors have more dividend paying names than others.

Sector

# of stocks

Utilities

59

Real Estate

109

Materials

85

Information Technology

105

Industrials

204

Healthcare

51

Financials

391

Energy

43

Consumer Staples

55

Consumer Discretionary

148

Communications Services

27

Source: mad-dividends.com

There are more financial stocks paying dividends than there are in the 6 sectors with the least dividend paying stocks.

Nonetheless there are high enough numbers in all sectors to analyze differences.

And the first notable difference is in dividend yield across sectors.

Sector

Median DY

Average DY

Real Estate

4.21

4.51

Energy

2.97

3.45

Consumer Staples

2.79

2.85

Utilities

2.72

2.81

Financials

2.44

2.60

Consumer Discretionary

2.16

2.64

Materials

2.01

2.43

Communications Services

1.88

2.83

Industrials

1.48

1.72

Information Technology

1.42

1.74

Healthcare

1.14

1.72

Source: mad-dividends.com

Of the 11 sectors, 4 have median dividend yields lower than 2%. The rest have median dividend yield between 2 and 3% with the exception of real estate with a median yield of 4.21%.

Certain sectors yield more than others, plain and simple.

Below is the Decile data per sector for dividend yields:

Sector/ Decile

1

2

3

4

5

6

7

8

9

10

Real Estate

2.25

2.71

3.18

3.87

4.21

4.73

5.18

6.07

7.40

11.64

Energy

1.02

1.43

1.65

2.05

2.97

3.91

4.56

5.16

6.07

11.39

Consumer Staples

0.94

1.23

1.73

2.15

2.79

2.96

3.21

3.69

5.39

10.42

Utilities

1.74

1.95

2.36

2.54

2.72

2.82

3.15

3.40

4.06

6.60

Financials

0.90

1.42

1.77

2.11

2.44

2.67

3.00

3.42

4.11

11.03

Consumer Discretionary

0.92

1.18

1.47

1.81

2.16

2.56

3.03

3.76

4.89

14.85

Materials

0.56

0.85

1.33

1.68

2.01

2.14

2.56

3.06

4.92

23.89

Communications Services

0.73

1.22

1.38

1.77

1.88

2.41

3.58

4.19

6.02

9.55

Information Technology

0.60

0.74

1.04

1.21

1.42

1.66

2.05

2.35

3.04

7.65

Industrials

0.60

0.83

1.13

1.27

1.48

1.78

1.99

2.34

3.00

9.60

Healthcare

0.27

0.39

0.63

0.97

1.14

1.50

1.86

2.70

3.77

8.31

Source: mad-dividends

While only 30% of real estate stocks yield less than 3%, 80% of healthcare and material stocks yield under 3%, while 90% of IT and industrial stocks yield below that amount.

This will explain while investors who need yield are often concentrated in real estate, energy, consumer staples and utilities.

There are also differences in payout ratios between sectors.

Sector

Median EPR

Average EPR

Real Estate

124.55

135.04

Utilities

61.60

69.53

Consumer Staples

54.95

59.63

Energy

47.37

56.20

Consumer Discretionary

36.21

45.11

Healthcare

36.19

48.68

Information Technology

35.63

50.28

Materials

34.22

45.10

Financials

32.79

38.96

Industrials

28.64

37.51

Communications Services

27.22

42.33

Source: mad-dividends

The data seems fairly consistent here: Sectors with the highest dividend yields also have the highest payout ratios. Two exceptions would be healthcare and information technology which have low yields relative to their payout ratios.

Below, you'll find the decile data for each sector's earnings payout ratios:

Sector/ Decile

1

2

3

4

5

6

7

8

9

10

Real Estate

61.28

81.54

99.75

115.58

124.55

141.13

159.82

197.07

227.73

285.56

Energy

8.11

10.72

15.79

28.14

47.37

55.99

75.88

93.22

113.07

282.69

Consumer Staples

24.06

32.46

41.08

45.16

54.95

63.50

71.94

81.83

93.21

200.00

Utilities

49.05

52.64

57.43

59.04

61.60

63.53

66.22

73.02

98.00

232.26

Financials

13.10

18.96

24.92

28.57

32.79

36.65

41.86

49.85

75.00

196.15

Consumer Discretionary

12.11

19.97

26.82

31.83

36.21

43.44

49.73

58.87

92.17

212.50

Materials

15.29

21.50

23.95

29.43

34.22

39.53

50.32

60.49

89.23

180.85

Communications Services

15.31

17.72

19.99

23.74

27.22

41.58

49.10

59.86

78.25

174.36

Information Technology

13.82

18.32

23.31

28.36

35.63

45.12

50.67

66.36

99.37

295.30

Industrials

9.57

15.09

20.16

24.16

28.64

32.42

39.35

48.01

70.33

285.71

Healthcare

12.58

19.23

23.40

27.95

36.19

41.40

53.33

70.41

89.41

284.38

Source: mad-dividends

Similar conclusions can be drawn by analyzing the operating cashflow payouts across sectors.

Sector

Median OP-CF PR

Average OP-CF PR

Real Estate

66.09

71.17

Consumer Staples

31.84

35.49

Utilities

29.30

29.98

Financials

24.29

30.08

Consumer Discretionary

23.22

30.76

Healthcare

22.15

29.58

Information Technology

21.92

29.97

Industrials

20.54

27.12

Materials

19.66

27.20

Communications Services

16.27

19.19

Energy

15.07

26.98

Source: mad-dividends.com

However, you'll note here that while the median operating cashflow payout ratio of real estate remains very high, other sectors have median payout ratios below 32%. Energy, which as you recall was the second highest yield, also boasts the lowest median payout ratios.

The decile data for cashflow payout ratios per sector is as follows:

Sector/ Decile

1

2

3

4

5

6

7

8

9

10

Real Estate

40.00

51.00

59.02

63.23

66.09

71.74

76.23

82.28

103.72

296.80

Energy

2.90

5.63

7.65

9.49

15.07

24.83

30.80

39.03

59.71

210.65

Consumer Staples

15.61

19.92

23.11

26.87

31.84

36.38

41.63

52.06

62.72

100.25

Utilities

16.66

22.63

25.46

26.49

29.30

31.00

34.31

38.58

42.85

57.72

Financials

6.24

12.56

16.94

19.83

24.29

27.53

31.46

38.23

53.10

254.16

Consumer Discretionary

6.93

12.06

15.96

21.43

23.22

27.28

32.83

38.95

52.78

225.39

Materials

8.40

12.70

15.72

17.73

19.66

24.67

27.86

36.87

52.97

138.39

Communications Services

10.34

11.23

13.86

15.24

16.27

18.68

24.15

27.94

31.40

39.19

Information Technology

9.23

11.78

15.52

18.85

21.92

25.69

31.54

36.55

51.27

204.90

Industrials

7.08

10.84

12.89

16.34

20.54

24.39

27.78

34.22

44.09

218.71

Healthcare

5.44

9.20

14.64

17.17

22.15

32.43

39.02

43.89

53.28

154.31

Source: mad-dividends.com

Finally the chart below charts the median dividend yields, earnings payout ratios and operating cashflow payout ratios per sector.

What dividend investors can do with this information?

Dividend investors can use this information to focus their efforts when searching amongst sectors for interesting dividend stocks. It will come as no surprise that it will be tough to find high quality healthcare stocks with high dividend yields, just like one shouldn't expect real estate and utility stocks to have low dividend payout ratios.

Investors can also make the decision to adjust strategic weights of each sector in their portfolios. With equal sector weights you'd have 9% in each sector. You might however decide on a base rate of 15% in utilities and real estate, and 5% in information technology, healthcare and industrials, knowing that you'll find more opportunities within those sectors.

The practical applications are endless. Hopefully you'll be able to refer back to this data in upcoming weeks to help figure out how you could best structure your dividend portfolio to meet your goals.

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Disclosure: I am/we are long CVI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.