I spoke recently with a friend who enjoys searching for Bigfoot. As you might imagine, this was an interesting conversation. What especially surprised me was that he primarily looks for the reportedly large, hairy creature in the Southeast U.S. rather than the Pacific Northwest.
Before I go any further, let me assure you this article is not about Bigfoot; it's about investing. However, it occurred to me after talking with my friend that there's a lesson to be learned for income investors from the search for Bigfoot.
That might sound crazy, but hear me out. Bigfoot hunters go where there have supposedly been Bigfoot sightings. The more reported sightings of the giant beast, the more an area will become a prime target for those trying to find it.
Income investors should take a similar approach: Go where the most stocks with juicy dividends are. And where are those especially juicy dividends? I'm glad you asked. Here are the three sectors to invest in to get the highest dividend yields.
1. Utilities
The utilities sector currently offers the highest average dividend yield of any S&P 500 sector. The average trailing 12-month dividend yield of utility stocks in the widely followed index is 4.85%.
Why do utility stocks tend to sport such high dividend yields? I'd say it's mainly because of a combination of two factors: relatively limited growth prospects and steady cash flow.
Utilities are heavily regulated. They must jump through hoops to expand in a significant way. Their growth is often largely dependent on the economic growth of the geographical regions in which they operate. However, utilities also tend to generate the aforementioned steady cash flow. Returning capital to shareholders as dividends makes sense in light of their restricted growth opportunities.
Income investors looking to invest in the utilities sector might want to especially check out Dominion Energy(NYSE: D). The electricity and natural gas company offers a forward dividend yield of 4.45%. The Federal Reserve's interest rate cuts will reduce Dominion's borrowing costs and could help boost its bottom line.
Even better, Dominion's area of operations includes Northern Virginia. The region is the world leader in data centers, which require massive amounts of electric power. With utilities frequently dependent on the economic growth of the geographies they serve, Dominion is poised for stronger growth than many of its peers thanks to artificial intelligence (AI) fueling the demand for more data centers.
2. Real estate
Real estate runs a close second place behind the utilities sector. The average trailing 12-month dividend yield for S&P 500 real estate stocks is 4.78%.
It shouldn't be surprising real estate ranks so highly. Many (although not all) of the members of the S&P 500 real estate sector are organized as real estate investment trusts (REITs). This is important because REITs are required to distribute at least 90% of earnings as dividends to preserve their tax-exempt status.
Realty Income (NYSE: O) stands out as one of my favorite real estate stocks. Its forward dividend yield is 4.96%. The REIT distributes its dividends monthly rather than quarterly -- a nice plus. The company has increased its dividend for 29 consecutive years.
I like Realty Income's diversification. It owns around 15,450 properties with tenants representing 90 industries. The company also targets growth markets including consumer-centric medical and data centers.
3. Energy
The energy sector comes in third place. The average trailing 12-month dividend yield for energy stocks in the S&P 500 is 3.5%, beating the consumer staples sector's average yield of 3.26%.
Although the energy sector is different in many ways from the utility sector, they have some similar reasons for paying attractive dividends. The growth prospects for many energy companies (especially those focusing on oil and gas) are somewhat limited. Large energy companies also tend to generate relatively stable cash flow and can have plenty of capital to fund their dividends.
I own several energy stocks. Enterprise Products Partners (NYSE: EPD) is an especially great one for income investors. The limited partnership pays a forward distribution yield of 7.25%. Enterprise has increased its distribution for 26 consecutive years.
The company operates over 50,000 miles of pipeline across the U.S. plus other assets including natural gas processing facilities and fractionators. Roughly 90% of Enterprise's long-term contracts are protected against inflation. Importantly, the midstream operator has a remarkably resilient track record, generating solid cash flow even during major economic turbulence.
Easy hunting
While I've highlighted Dominion Energy, Realty Income, and Enterprise Products Partners, income investors won't have any problems identifying many other great stocks in the utilities, real estate, and energy sectors. High dividend yields in these S&P 500 sectors are much easier to find than Bigfoot.
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Keith Speights has positions in Dominion Energy, Enterprise Products Partners, and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Dominion Energy and Enterprise Products Partners. The Motley Fool has a disclosure policy.
