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Getting to Know the S&P500


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Everybody and their uncle is familiar with the S&P500 index as a indicator of how well the economy is doing and as a benchmark for their own success as an investor.  But how much do people really know about the S&P500 and it’s component companies?

What is the S&P500?

The S&P500 is market index based on 500 top American companies as determined by Standard and Poor’s.  The index began on March 4th, 1957, and is considered to be one of the best representations of the stock market.  In order to be included in the index, a company must have publicly traded common stock that is considered to  be sufficiently liquid.  The companies included in the index are selected by a committee which tries to select companies that it feels are representative of the US economy.  Each company’s representation in the index is float weighted, which means that it’s contribution to the index is based on the number of shares available for public trading.

The S&P500 list is not static.  As the US economy changes, new companies emerge. Did anyone even know what Google was 20 years ago? And established companies recede.  Fannie Mae, Freddie Mac, Dillard’s and Wendy’s were all once a part of the S&P500.  Now I suppose they just sit around reminiscing about their old glory days while packing on a beer belly like former high school football players.

The S&P500 is a “price return” index, which means that it does not include dividend payouts.  Only changes in share prices are tracked.  While there are a couple of other versions of the S&P (total returns and net total returns), the price return version is the one most commonly quoted.  The S&P500 total return accounts for dividend reinvestment and is also worth being familiar with.  You can see how the S&P500 is doing at any time on their website.

Sector Breakdown

The S&P500 is comprised of 10 sectors listed below.  Companies in each sector tend to have strong correlations, especially over the short and mid terms, between several key metrics including, revenue, earnings growth, overall performance, and earnings forecasts.  Some companies could belong to multiple sectors, but the rule thus far has been one company, one sector.

The percentage next to each sector indicates representation of that sector within the S&P500 at the end of 2012.  Current information is available on the S&P500 website.

  • Energy (10.99%)
  • Materials (3.2%)
  • Industrials (10.12%)
  • Consumer Discretionary (11.50%)
  • Consumer Staples (10.61%)
  • Health Care (12.01%)
  • Financials (15.61%)
  • Information Technology (19.04%)
  • Telecommunications (3.06%)
  • Utilities (3.43%)

Sector weightings change over time, but t hey change very slowly.  From 2007 to 2012 there has only been minor fluctuations in the overall weight of each sector.

However, in the long run the sector weightings do change. Back in the 1980s telecommunications used to represent about 10% of the index, now telecommunications represents about a third of that.  Back in the late 1990′s (the ear of cheap gas) the energy sector represented about 5% of the index vs the 10% or so that it represents now.

Note: S&P500 – if you guys are reading this, there is no reason why your sector weighting spreadsheet shouldn’t go all the way back to 1957.  I’m disappointed.

Dividend Growth Stocks in the S&P500

Not every stock in the S&P500 pays dividends.  And not every dividend paying stock has a history of consistently raising dividends for at least 10 years.  So I decided to take a look at how many dividend champion, challenger, and contender stocks were components of the S&P500.  I mostly did this as an excuse to have fun with Excel – nerd alert!

The first number represents stocks with 10+ years of dividend growth (champions and contenders).  The second number represents those with 5-9 years of dividend growth (challengers).  The third number is the total number of companies within that sector.

  • Energy (7 / 1 / 43)
  • Materials (11 / 0 / 30)
  • Industrials (20 / 14 / 60)
  • Consumer Discretionary (13 / 5 / 83)
  • Consumer Staples (15 / 12 / 42)
  • Health Care (7 / 4 / 52)
  • Financials (8 / 5 / 81)
  • Information Technology (8 / 7 / 70)
  • Telecommunications (1 / 1 / 8)
  • Utilities (8 / 10 / 31)
  • S&P500 Total ( 98 / 59 / 500)

There are 98 companies on the S&P500 that have consistently raised dividends for at least 10 years.  There are another 59 companies that have consistently raised dividends for 5-9 years.

The List

For your viewing pleasure, I prepared a list of dividend growth stocks in the S&P500.  This list is based the S&P500 list and the dividend champions, contenders, and challengers lists as they were at the end of 2012.

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Conclusions

For neophyte dividend investors, picking solid dividend growth stocks off of the S&P500 is a great way to get started investing.  All the capital gains that you’d expect from solid blue chip stocks with dividend growth thrown in to boot.  Even if you’re an experienced investor, this is a great list to revisit regularly.

Readers: Do you invest in an S&P500 index fund?  Do you you pick dividend growth stocks off of the S&P500?  Do you use the S&P500 to benchmark your own investments against?

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11 Responses to "Getting to Know the S&P500"

  1. I invest in an S&P500 index fund as well as an ETF. However, I tend to prefer to invest in the broader range index fund that represents the Total Stock Market/Wilshire 5000 if possible. However, the S&P500 isn’t a bad place to start.

    It’s really interesting to see the breakdown of different percentages! Who knew that info technology has the highest percentage representation?!

    1. The “experts” consider the S&P500 to be the best gauge of the true market, so everyone benchmarks against it.

      I’m not a huge fan of index funds for the simple reason that you’re investing in tons of companies regardless of their valuation. No one should have been buying Apple at $700, but all the index funds were. Similarly for almost any stock with a high PE.

  2. kimateyesonthedollar says:

    I do have a portion of my investments in an S&P Index fund. It’s always nice to have a review and she which stocks are included. I certainly should keep up with it better. My favorite name if the YUM foods. How can you go wrong with that?

    1. I use an S&P500 index fund in my 401k, because it’s the best option out there. Personally, I prefer to cherry pick the stocks that I like. I also think that YUM has some good growth potential in the future, especially with international expansion.

  3. A lot of personal finance pros would probably freak out for me admitting this, but our retirement is 100% invested in the S&P 500. We’re only 30 atm though and all of retirement funds are in my wife’s 401(k). Once I get a ROTH IRA I’ll diversify more.

    1. MFIJ says:

      Justin,

      Thanks for stopping by. And thanks for being the first person to brave making a comment on the new theme.

      All my 401k savings is in an S&P500 index fund. It’s simply the least expensive and probably best fund that they offer. So I go with it. I might diversify outwards into some bonds starting in a few years as I get older.

  4. First, love the new look! Second, love the new commenting!

    I have my 401k in an ETF that tracks the S&P 500. For dividends, like DVY, which picks the best dividend companies in the Dow, but a very similar mix.

    1. MFIJ says:

      I’m glad that you like the new look and commenting system. I’m still working to get all the kinks out of the new theme.

      My 401K is an S&P500 index fund. It was the lowest cost fund in the plan. Otherwise all my investments are in dividend paying stocks.

  5. Did you change your layout? I really like it! This is a very informative post with lots of great info!!!

    1. MFIJ says:

      I decided to move off of WordPress.com and get my own hosting. I was also able to update the layout. Took me all night just to get everything usable. I’m glad you like the new look. I’m going to be tweaking it for a while, but I’m pretty happy with how it’s turning out.

  6. [...] introduction to the S&P500 was mentioned in The Frugal Path’s Saturday [...]

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