There’s no doubt about it … traders can’t get enough equity exposure right now. As more and more money flows into the stock market, the S&P 500 keeps moving higher and higher.
To put this in perspective, the S&P 500 has risen nearly 42% from its low of 2,346.58 on Dec. 26, 2018 to its recent intra-day high of 3,329.88 on Jan. 17, 2020. That’s an amazing gain in just over a year.
However, if you dig a little deeper and look at the performance of the individual sectors within the S&P 500 during the past few weeks, you’ll see an interesting trend is emerging. The sectors with high-dividend yielding stocks are driving the lion’s share of the January gains.
Starting in early January, the Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE), the Utilities Select Sector SPDR Fund (NYSEARCA:XLU) and the Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) — exchange-traded funds tracking sectors that contain stocks that pay great dividends — all started climbing higher.
You can see this move starting around Jan. 7 and Jan. 8 in the comparison chart below.
Daily Charts
So, what caused each of these sectors to start outperforming the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), an ETF that tracks the performance of the S&P 500, for the past few weeks?
We think the move is largely being driven by a corresponding drop in longer-term yields.
You can see this downturn illustrated in the red box on the daily chart of the 10-year Treasury yield as represented by the CBOE 10-Year Treasury Yield Index (TNX) in the chart below.
The TNX had been forming higher highs in late 2019 (see the green arrow) as bond traders started demanding higher yields on their longer-term Treasury investments.
Unfortunately, that trend didn’t have enough momentum to carry through the end of the year. The highs the TNX was forming on its chart started to flatten out by late December (see the blue arrow).
The TNX ultimately started to decline and form lower highs this month (see the red arrow).
As longer-term bond yields have started dropping again, traders have started looking for other sources of yield. They seem to have settled on stocks with strong dividends.
Strong Dividend Yields
The real estate sector, the utilities sector and the consumer staples sector all have stocks with dividends that yield more than the 1.78% the TNX currently offers.
Here are a few examples from the top 10 holdings of the three ETFs that correspond with the sectors we mentioned:
Real Estate (XLRE):
- Crown Castle International (NYSE:CCI) — 3.2% dividend yield
- Welltower (NYSE:WELL) — 4% dividend yield
- Public Storage (NYSE:PSA) — 3.6% dividend yield
Utilities (XLU):
- The Southern Company (NYSE:SO) — 3.6% dividend yield
- Dominion Energy (NYSE:D) — 4.4% dividend yield
- Duke Energy (NYSE:DUK) — 4% dividend yield
Consumer Staples (XLP)
- Philip Morris International (NYSE:PM) — 5.3% dividend yield
- Kimberly-Clark (NYSE:KMB) — 2.9% dividend yield
- Procter & Gamble (NYSE:PG) — 2.4% dividend yield
When buying high dividend-yielding companies like this right now, traders get not only the added bonus of great dividend payments but also see the value of the stocks increase.
The Bottom Line
Keep an eye on the TNX. If it continues to fall, high dividend-yielding stocks are likely going to see even more money flowing into them. This should continue driving them higher, helping them outperform the S&P 500.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it. John & Wade do not own the aforementioned securities.
