What Is The Dividend Yield of XLP?

The SPDR Consumer Staples Select Sector Fund (XLP) is a benchmark electronically traded fund for investors looking to add consumer staples stocks to their portfolios.

In 2023, the fund effectively stagnated as the S&P 500 surged by nearly 25% and in that underperformance lies an opportunity that XLP could be an undervalued going into 2024.

What Stocks Are in XLP?

The XLP fund tracks a group of consumer staples stocks selected from the broader S&P 500.

The fund contains 38 individual stocks and the top five holdings account for over 45% of the fund’s total assets:

Other prominent stocks that appear further down the fund’s list of holdings include Target (NYSE:TGT), Colgate Palmolive (NYSE:CL) and General Mills (NYSE:GIS).

XLP currently has $15.3 billion of assets under management and carries a fairly modest expense ratio of 0.10%.

Historically, the fund has averaged a return of 6.5% annually since its inception in 1998. The past 10 years have been the best period in the fund’s history, with returns averaging 7.9% annually.

Investors should bear in mind that these return rates don’t include dividends, which add considerably to the overall performance of the fund.

XLP Valuation and Growth Projections

XLP appears to be fairly valued at today’s prices. The forward price-to-earnings ratio for the fund is currently 19.9. This is roughly in line with the 19.7 ratio for the broader S&P 500 and indicates that the fund is valued accurately when compared to the average of large-cap stocks.

Its price-to-cash-flow ratio of 16.0 is also quite reasonable and suggests that it is moderately undervalued.

The composite earnings growth rate of the stocks in the Consumer Staples Select Sector fund is expected to be around 7.5% over the next 3-5 years. Notably, this rate suggests the fund may lag the overall S&P 500. In 2024, for instance, the S&P is projected to see earnings increase by 11.1%.

What Is The Dividend Yield of XLP?

The 30-day yield on XLP currently stands at 2.6%, handily beating out the S&P 500 average of 1.5%.

It’s interesting to note that the last time the S&P overall offered a yield equivalent to XLP’s current dividend was at the height of the 2020 COVID-19 selloff.

Prior to that, the index hadn’t had an average yield of over 2.5% since 2009.

Is XLP a Buy?

At first glance, XLP looks like a moderate buy. The fund is valued at a roughly similar premium to the S&P 500 and is expected to produce relatively stable growth over the coming 12 months. The question, though, is whether XLP is a good buy when compared to a full S&P 500 index fund like VOO.

It may actually be a more compelling buy than it appears at first glance. To begin with, the consumer staples sector is one of the safest and most reliable sectors for investors during economic downturns. With a mild recession looking increasingly likely in 2024, funds like the SPDR Consumer Staples Select Sector may offer investors safe havens in what could otherwise be a choppy market.

XLP has also outperformed some of its competitor funds in the early days of 2024. The ETF has gained 0.33% YTD, compared to a loss of 3.6% for SPDR’s Technology Select Sector Fund (XLK). VOO, which tracks the entire S&P 500, has lost 1.7%.

Although it’s still very early in the year, this initial performance disparity may indicate that investor sentiment could turn toward consumer staples in 2024.

Additionally, the fund is heavily weighted toward proven long-term compounding stocks that have produced decades of solid results for investors, making it an attractive choice for conservative investors looking for slow, steady growth over long time periods.

While XLP likely won’t produce the kind of large returns that technology ETFs can, it also isn’t as vulnerable to high levels of volatility.

This also brings up XLP’s performance relative to the S&P 500 over the course of 2023. Last year, seven high-growth tech stocks trading at very high earnings multiples pulled the index into bull market territory.

The majority of stocks in the index gained just 6% overall, meaning that the 24.7% headline growth of the S&P 500 masked a lot of underlying weakness. Excluding these seven technology stocks, XLP’s performance last year actually rivaled that of the vast majority of stocks in the broader based market. 

An advantage to the Consumer Staples fund is its above-average dividend income potential. During tough economic times, dividends provide a reliable form of returns for investors. This is especially true in periods when inflation runs hot.

In the 1940s and 1970s, both decades of higher-than-average inflation, dividends accounted for over 50% of the stock market’s total return. Even with inflation expected to fall this year, the dividend focus of XLP could help investors see safer and more stable returns in 2024.

On the risk side of the equation, XLP is exposed to the possibility of lower consumer spending at retail stores. Costco, Target and Walmart are all now vying with the likes of Amazon for market share. Although this risk isn’t directly related to the consumer staples segment of these businesses, the companies as a whole sell far more than just day-to-day necessities.

Nearly 8% of the fund’s holdings are also in tobacco stocks. While these stocks are excellent dividend producers, the steady decline of cigarette sales over the past 10 years could be a long-term negative for this portion of the portfolio. Tobacco manufacturers are pivoting to other products but could see their revenues slip as smoking among American consumers continues to diminish.

In spite of these modest risks, XLP appears to be a good fit for value investors, those seeking long-term conservative growth and those focused on dividend income going into 2024.

It’s important to note that the S&P 500 could still outperform XLP over the coming 12 months. The seven stocks that carried the index in 2023 could still have room to run, especially as the Federal Reserve begins to wind down its baseline interest rates. Those stocks, however, are still quite likely to be overvalued. The XLP fund, by contrast, appears to offer good value at a relatively low risk level.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.