The stocks that generate the most income in the S&P 500 could pose a risk to investors as the Federal Reserve carries out its plan to raise interest rates, according to some strategists.
The five highest-yielding stocks in the S&P 500 include telecommunications company CenturyLink, digital data storage firm Seagate, Macy’s, information management service company Iron Mountain and real estate investment trust Kimco Realty. They carry dividend yields of 9 percent, 6.8 percent, 6.6 percent, 6.5 percent and 6 percent, respectively.
Names in the telecommunications, utilities and real estate sectors are particularly vulnerable to swings in interest rates and typically move inversely to rates.
The fact that a company offers a high dividend yield may point to problems for the respective stock, said Miller Tabak equity strategist Matt Maley.
“It’s great when the whole market goes down, and they throw the baby out with the bathwater so you get some stocks that pay some high dividends and you get them at a good level,” he said Friday on CNBC’s “Trading Nation.” “I’m more afraid of some of the more traditionally interest rate-sensitive names that have done so well, like the utilities. I’m not saying I’m bearish on utilities, but they’ve had this great run, they have a lot of investors in them, a lot of momentum players that aren’t traditional utility players. They’re kind of weak hands, they can dump the stocks.”
Maley isn’t particularly bearish on any of the five highest-yielding names, even as a stock like Macy’s has fallen more than 40 percent year to date. (It slumped 7 percent Monday.) Maley said unless investors are truly worried about any of these names going out of business, there might be “some upside surprises in them, because they all have a lot of short interest built up.”
For example, Kimco Realty has gotten “clobbered” this year, he said, falling nearly 28 percent. But it keeps trying to bounce, and its 50-day moving average is the stock’s level of resistance. “One of these days, it’s going to break that moving average, and when it does it’s going to take off,” Maley said.
When it comes to the five highest-yielding names in the S&P 500, Susquehanna’s Stacey Gilbert said that while each name is facing its own company-specific issues, she is largely concerned about investors’ rotation away from dividend-yielding sectors like telecommunications and real estate investment trusts (REITs).
Gilbert’s firm carries neutral ratings on Seagate, as well as Macy’s, recommending investors do not add more to positions in either name.
As for the interest rate-sensitive sectors and exchange-traded funds that track those groups of stocks, Gilbert pointed to the iShares Select Dividend ETF, the DVY, and the SPDR S&P Dividend ETF, the SDY. The funds have a combined $33 billion in assets under management.
“If there’s a significant shift away from dividend yielding [sectors], some of the names that are in those sectors or ETFs — mostly utilities, mostly REITs, mostly telecom — those could come under pressure, and I would say consumer staples is another concern,” she said Friday.