I know it's an odd question, but do you know where your dividends come from? Until yesterday I would have said I absolutely did, but I recently got a wake-up call with some new perspective.
If you think about it, a lot of long-term investors have exposure to the SPDR Trust (NYSE: SPY ) , through a 401(k), a mutual fund, or our own investing portfolios. The SPDR Trust is an exchange-traded fund that tracks the S&P 500 and essentially allows investors to mirror the returns of the market while pocketing a current annual dividend of 1.7%. If you had asked me last week which sectors contributed the most to that dividend yield within the past decade, I would have assuredly answered the utility and financial sectors -- and I would have been brutally wrong!
Here's where your dividends come from
In actuality, as Barron's recently pointed out, out of the 10 major sectors within the past decade, financials have delivered the lowest overall yield at 1.01%. I would have been correct in predicting that utilities offered the highest yield at 3.84%, but given that they make up a mere 3.3% of the S&P 500 index, they have a much smaller than anticipated effect on its dividend yield.
The biggest sources of the S&P 500's current yield are actually the consumer staples, technology, health care, and industrial sectors. Not surprisingly, these sectors comprise a large portion of the index and therefore make up more than half of the current S&P 500 dividend yield.
The hidden lesson
The hidden lesson in all of this is that index funds may not be the investments you thoughts they were on the surface. If your intention is to seek the safety and income of high-yield dividends, directly investing in specific SPDR sectors or large-cap companies could produce the results you initially thought you were getting with the SPDR Trust.
The SPDR Utilities (NYSE: XLU ) is just one example. The utilities sector makes up a small percentage of the S&P 500's overall weighting, but this utility sector ETF is yielding nearly 4%.
Another approach would be to seek out large-cap names that offer a stable history of dividends. After looking through those sectors for best prospects, here are the stocks I chose:
|Southern Company (NYSE: SO )
|Johnson & Johnson (NYSE: JNJ )
|AT&T (NYSE: T )
|ONEOK Partners (NYSE: OKS )
|Clorox (NYSE: CLX )
Source: Yahoo! Finance.
In the utility sector, Southern offers a dividend yield of 4.5% and (ignoring a special dividend in 2001) hasn't lowered its quarterly payout in the past 30 years. Other stable long-term winners like Clorox, AT&T, and Johnson & Johnson show similar multi-decade patterns of dividend raises that handily beat the current yield on the S&P 500.
Know what you're buying
Although I don't directly own the SPDR Trust, I wouldn't have really known where my dividends were coming from if you asked me last week. Understanding the nature of your investments and the timeframe of when you want to achieve your goals is paramount to your success. All dividends are not created equal, and knowing where your dividends really come from can be the difference between a flat yield and a growing dividend.
Do you really know where your dividends come from? Share your ideas in the comments section below and consider tracking these high-yielding dividend plays with the free and easy-to-use My Watchlist.