Why bother with S&P 500 stocks when you can get a 5% yield from bonds? Simple. Stocks yield more than just dividends — much more so in some cases.
And eight stocks in the S&P 500 — including American Airlines, Comerica and Valero Energy — tout an aggregate yield of 20%, or much more if you add their earnings yields to their dividend yields, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
These stocks highlight a mistake some investors are making, says Wells Fargo Investment Strategy Analyst Austin Pickle in a report. Simplistically comparing bond yields with stocks' dividend yields misses out on one of the key sources of income: earnings.
Factoring in earnings yields, or a company's earnings in the past 12 months divided by the stock price, gives investors a more complete picture of what you're gaining by owning stocks.
"While earnings are not tangible payouts to investors like dividends, they are the driving force of stock price gains, and how much investors pay for those earnings matters," said Pickle. "When this earnings yield is considered, aggregate stock yields handily surpass the 10-year U.S. Treasury yield."
Why Bother With S&P 500 Stocks?
There's no doubt Treasuries and even savings accounts are more compelling now that they pay 5%. But that's only part of the picture.
Treasuries are just IOUs. You don't own part of a company generating additional, usually growing, profit. That's becoming an increasingly important factor to consider.
S&P 500 companies are currently reporting third-quarter results. And earnings are looking better than feared. S&P 500 companies' profit is expected to rise 0.4% in the third quarter. And if that's right, it would mark the "first quarter of year-over-year earnings growth for the index since (the third quarter of) 2022," said John Butters, earnings strategist at FactSet.
And that's just the start. In the fourth quarter, the S&P 500's earnings growth rate is seen hitting 7.6%. And next year, S&P 500 profit is expected to soar 12.2%, FactSet says.
You don't get any of this growth if you're just buying bonds.
Top 'Aggregate Yield' Plays
It's important to add earnings yields (and perhaps buybacks too). Just know what you're paying for.
At first glance, utility PG&E is blowing away the yield curve with a combined earnings and dividend yield of 35.6%. That's higher than on any other S&P 500 stock. But take a minute and it looks much less impressive. PG&E's earnings yield is just 1.8%. Most of the aggregate yield is coming from an unusual and likely not repeated dividend yield of 33.8%.
But PG&E is more of the exception than the rule. American Airlines is flying with an aggregate yield of 26.8%. But that's entirely due to the company's elevated earnings yield of 26.8% from its robust adjusted profit in the past 12 months of $3.20 per share. It's not paying a dividend.
Some S&P 500 financials have a more balanced aggregate yield. Take regional bank Comerica. It pays a total yield of 26%. And of that, nearly 7% is from its traditional dividend. The rest comes from its 19% earnings yield.
Similarly, energy firm Valero pays a decent dividend yield of 3.2%. But what pushes its total yield to 21.3% is the earnings yield of 18.1%.
Such examples highlight the value of owning a growing company's shares, vs. just an IOU or bond paying the same no matter what.
"The propensity of stocks to grow earnings over time has helped power stocks to greater long-term historical total returns than bonds throughout both high- and low-interest-rate environments," Pickle said. "Stocks do offer more than just a dividend and buyback yield, and investors should be aware."
S&P Highest Dividend Plus Earnings Yields
| Company | Ticker | Earnings yield | Dividend yield | Combined yield | Sector |
|---|---|---|---|---|---|
| PG&E | 1.8% | 33.8% | 35.6% | Utilities | |
| American Airlines | 26.8 | 0.0 | 26.8 | Industrials | |
| Comerica | 19.0 | 7.0 | 26.0 | Financials | |
| Valero Energy | 18.1 | 3.2 | 21.3 | Energy | |
| Verizon Communications | 12.2 | 8.7 | 20.9 | Communication Services | |
| Invesco | 14.6 | 6.1 | 20.7 | Financials | |
| Organon | 13.6 | 6.5 | 20.1 | Health Care | |
| AT&T | 12.3 | 7.7 | 20.1 | Communication Services |
