Cheap dividend-paying stocks are the new sugar high for S&P 500 investors: They might hurt you down the road, but they sure feel good now. And ETFs offer a way to grab some of these stocks while spreading out the risk.
Fifteen "cheap" stocks in the S&P 500 Pure Value index — including energy firms Valero Energy and Exxon Mobil and consumer-staples play Kraft Heinz — pay market-beating dividends of 3.5% or more. And most important, they're all up for the year, while the S&P 500 is down more than 12%. Given the market's rejection of high-priced stocks paying no dividend, like Netflix, investors are looking for stocks they can hold on to amid a choppy market.
"Dividend stocks have managed to remain in positive territory, gaining about 6.5% so far this year," says Jack Ablin, strategist at Cresset Capital. "Growth stocks, after surging 32% last year, have given back more than 17%."
Appreciating S&P 500 Dividends
Investors are rediscovering the power of S&P 500 dividends. And they want a piece.
That's somewhat of a reversal. The S&P 500 gained 16.5% annualized from 2011 to 2021, Ablin says. And of that, nearly 70% was due to investors paying higher prices for every dollar of earnings. That meant only a sliver of stock gains could be attributed to dividends or earnings growth. But with interest rates rising, investors are less willing to pay so dearly for profits that might not materialize for many years.
Expect dividends to keep their allure as inflation remains stubbornly high, Ablin says. "History has shown that high-quality, dividend-paying companies indeed deliver income streams that enable their holders to stay ahead of inflation," he said. "That's something that not even high-quality bonds can offer."
And the S&P 500 this year shows how investors are scrambling for yield. Valero Energy, yielding 3.7%, is up 46% this year. Exxon Mobil's shares are up nearly 40% and pay 4.3%. Chevron yields 3.6% and is up more than 34% this year. Not surprisingly, big energy ETFs are the way to zero in on these low-priced stocks with dividends. VanEck Oil Refiners puts a bigger chunk of its portfolio, 7.2%, in Valero than any other. And it yields 2%. Meanwhile, Energy Select SPDR Fund puts 22.6% of its portfolio in Exxon Mobil, more than any other ETF. And it yields 3%.
Dividend ETFs More Than Just S&P 500 Energy
But what if you want dividends, without loading up on energy? Among the most popular ETFs paying high dividends is the Vanguard High Dividend Yield, says Todd Rosenbluth, head of research at ETF Trends. For a tiny 0.06% annual expense ratio, the ETF gives you a 2.8% dividend yield and scatters your investment beyond the energy sector. Only 9% of the ETF is invested in energy. Some 20% is in financials, with 14% in health care and 12% in consumer staples. Kraft Heinz is a 0.2% position. The ETF is down 2.7% this year.
The next most popular dividend ETF is SPDR Portfolio S&P 500 High Dividend. It takes a different and more traditional approach to capturing yield, Rosenbluth says. "The ETF was heavily weighted to utilities, 19% of assets, and energy 15%, relative to the parent S&P 500, with stakes in Chevron and Valero."
The ETF charges just 0.07% annually. But that approach is working well this year, with the ETF up more than 3%. The ETF also has a low expense ratio, charging just 0.07%.
And yet another approach is the Invesco S&P 500 High Dividend Low Volatility ETF. It yields a whopping 3.3%. And on top of that, it's up nearly 5% this year. It does this, Rosenbluth says, by loading up mainly on stable dividend growers like utilities and consumer staples. Money is pouring into the ETF: $123 million in just a month.
After a decade of all but ignoring them, investors now want their dividends.
Top-Performing 'Cheap' Stocks Paying Big Dividends
S&P 500 Pure Value stocks yielding 3.5% or more that are up this year
| Company | Symbol | Dividend yield % | Stock YTD % ch. | Sector |
|---|---|---|---|---|
| Valero Energy | 3.73% | 46.1% | Energy | |
| Exxon Mobil | 4.28 | 39.6 | Energy | |
| Chevron | 3.63 | 34.3 | Energy | |
| Dow | 4.16 | 20.4 | Materials | |
| Kraft Heinz | 3.78 | 19.1 | Consumer Staples | |
| Kinder Morgan | 6.02 | 16.6 | Energy | |
| Phillips 66 | 4.49 | 15.9 | Energy | |
| LyondellBasell Industries | 4.34 | 15.3 | Materials | |
| Omnicom Group | 3.57 | 7.4 | Communication Services | |
| Organon | 3.54 | 7.2 | Health Care | |
| Pinnacle West Capital | 4.51 | 6.4 | Utilities | |
| Conagra Brands | 3.53 | 5.0 | Consumer Staples | |
| Edison International | 3.99 | 3.5 | Utilities | |
| Prudential Financial | 4.35 | 3.2 | Financials | |
| International Paper | 3.93 | 1.5 | Materials |
