Analysis: Dividend stocks lose shine as U.S. bond yields rise

Thu May 30, 2013 7:08pm EDT
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By Chuck Mikolajczak

NEW YORK (Reuters) - As the S&P 500 stormed to a gain of 16 percent for the first five months of the year, the run was fueled by investors searching for yield.

With central banks driving interest rates lower, slower-growth sectors with big dividends like utilities and telecom were attractive because they offered better returns over government debt along with the possibility of price appreciation.

Those sectors led stocks higher for several months - but that outperformance appears to have come to an end as U.S. Treasury bond yields climbed to 13-month highs this week. The economic outlook in the United States has improved, and rumblings of a pullback in the Federal Reserve's massive bond-buying program have caused investors to pull away from the big dividend payers.

For the year through April 30, the S&P 500 .SPX rose 12 percent, led by an 18.4 percent gain in both utilities .SPLRCU and healthcare .SPXHC, as well as a 17.1 percent climb in consumer staples.

The S&P 500 - with only one trading day left in May - has climbed about 4 percent this month - giving the benchmark index a gain of 16 percent for the year so far, based on Thursday's close.

Central banks have kept yields low through heavy bond purchases, prompting investors to bid up the prices of corporate and high-yield debt, along with stocks. Still, insecurity about global recovery meant investors looked for "safer" versions of risky assets.

With the S&P 500 showing a dividend yield at 2.4 percent, investors were drawn to sectors with higher yields. The dividend yield on telecoms stands at 4.6 percent, while the utilities sector is at 4 percent and the consumer staples sector .SPLRCS is at 2.7 percent.

The S&P 500 just kept going in May, rising 3.6 percent so far. But utilities have been crushed, falling 9.2 percent, while staples have dipped 0.2 percent and telecoms have stumbled 5.2 percent.   Continued...

Traders work on the floor of the New York Stock Exchange March 13, 2009. REUTERS/Brendan McDermid