LIVE MARKETS-In the event of a valuation-driven drop, dividends might soften the blow

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IN THE EVENT OF A VALUATION-DRIVEN DROP, DIVIDENDS MIGHT SOFTEN THE BLOW

The topic of valuations is at the forefront of investors' minds these days. According to Sam Stovall, chief investment strategist at CFRA, the S&P 500 is trading at a price-to-earnings (P/E) ratio of 24x next-12-month (NTM) earnings projections, which is a 42% premium to its 20-year average.

Stovall also notes that the S&P 500 Tech Sector trades at a 66% premium to its 20-year average, while Communication Services (43%), Consumer Discretionary (41%), and Industrials (47%) also trade at elevated levels relative to their long-term averages. In fact, he says that all remaining sectors, except Energy (-8%), are trading at double-digit premiums.

As Stovall sees it, investors concerned about a possible market pullback might want to look to dividends to provide a cushion in the event of a downturn.

"Not surprisingly, the more 'defensive' sectors within the S&P 500 – Consumer Staples, Energy, Real Estate, and Utilities – along with the S&P 500 Value group paid the highest average dividend, while the Communication Services, Consumer Discretionary, and Information Technology sectors, as well as the S&P 500 Growth group, paid the lowest," writes Stovall in his latest Sector Watch note.

In the report, Stovall lists 10 of the highest-yielding stocks in the S&P 500 that carry 4- or 5-star rankings by CFRA analysts, with dividend payout ratios of 75% or lower. Among these names are: Comcast Corporation CMCSA.O, EOG Resources Inc. EOG.N, Exxon Mobil Corporation XOM.N, Hasbro Inc. HAS.O, and Merck & Co. Inc. MRK.N.

(Terence Gabriel)

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