This sector of the S&P 500 is expected to show the fastest sales and dividend growth in 2022 and 2023

So far this year, investors have been jittery because of the Federal Reserve’s policy reversal, to fighting inflation by raising interest rates rather than doing anything it could to spur economic growth during the pandemic.

In a strategy report for clients on Jan. 17, analysts at BCA Research wrote: “We subscribe to the view that expansions are more likely to be murdered by the Fed than die of old age. It’s hard to envision a plausible scenario in which the Fed could hike rates enough in 2022 to kill this one, though, and even the first half of 2023 would be a reach.”

We have already seen that the prospect of rising interest rates has pressured stocks that have higher valuations to earnings. The Nasdaq Composite Index COMP, which is heavily weighted toward technology stocks, just suffered its first correction (a decline of 10% of more) since March.

Getting back to the BCA comment, the U.S. economy is so large that it isn’t easily cooled-down by the Fed. Investors who flee the stock market in an effort to time their return after rising interest rates have their effect, risk returning too late and missing significant growth in the meantime.

S&P 500 sector projections

The following projections are based on consensus estimates among analysts polled by FactSet, weighted by market capitalization. (The S&P 500 is cap-weighted.) The projections are broken into three tables showing expected changes in sales per share, earnings per share and dividends paid per share. The estimates are for calendar years, as scores of S&P 500 companies have fiscal years that don’t match the calendar.

Sales growth

First, here are projected changes in sales per share through 2023, with the sectors in alphabetical order and the full index at the bottom:

The consumer discretionary sector is expected to show the most rapid increases in sales per share this year and in 2023, and to have the best two-year compound annual growth rate (CAGR) for sales.

Earnings growth

Leaving the sectors in the same order, here are projections for earnings per share:

The industrial sector is expected to achieve the best EPS growth this year, trailed closely by the consumer discretionary sector, which is expected to take the lead in 2023 and have the best two-year EPS CAGR.

Dividend increases

Again leaving the sectors in alphabetical order, here are projections for dividend increases through 2024:

The consumer discretionary sector is expected to show the highest dividend growth, by far, among S&P 500 sectors through 2023.

A screen of consumer discretionary stocks

One way to invest in the entire sector is by selecting an exchange-traded fund that tracks it, such as the Consumer Discretionary Select SPDR ETF XLY or the Vanguard Consumer Discretionary ETF VCR.

There are 60 stocks in the S&P 500 consumer discretionary sector, which includes companies in the hotel, cruise line, casino and travel services industries that have been grossly affected by the pandemic. With a strengthening recovery in travel-related industries expected over the next two years, it is no surprise that these industries top lists of companies with highest projected growth rates for sales and earnings.

Then again, there are plenty of companies outside these industries expected to put up impressive sales numbers.

With earnings for so many of these companies expected to be negative this year or to turn positive following losses in 2021, the following screens won’t include earnings projections.

Here are three screens of stocks within the consumer discretionary sector.

Sales

Among the 60 stocks in the S&P 500 consumer discretionary sector, here are the 20 expected to increase sales the most rapidly through 2023:

Among the 20, nine are outside the hotel, cruise line, casino and travel services industries. These include Amazon.com Inc. AMZN, Tesla Inc. TSLA, and General Motors Co. GM.

You can click on the tickers for more about each company.

Then read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Dividend growth

For dividend projections, there needs to be a starting point. Even though the consumer discretionary sector is expected by analysts to post the most rapid growth in dividend payouts through 2023, 25 of the 60 companies don’t pay any dividends on common shares currently, according to FactSet.

Among the 60 stocks, 20 have dividend yields of at least 1.50% and consensus estimates available for their dividend payouts in 2022 and 2023. Narrowing the list further, here are the 10 expected to increase their payouts the most over the next two years:

Dividend compounding can be effective for investors wishing to build up dividend income while still pursuing long-term growth. In the right-most column, there are hypothetical dividend yields based on the consensus 2023 payout estimates and closing share prices on Jan. 19.

Consider Home Depot Inc. HD for a five-year example. If you had purchased the stock at the close on Jan. 19, 2017, you would have paid $135.39 a share. At that time, the annual dividend rate was $2.76 a share, for a yield of 2.04%. If you had held the shares through Jan. 19, 2022, your annual dividend would have increased to $6.60 a share, for a yield of 4.87% for your five-year-old shares. Meanwhile, your share price would have increased by 166% to $359.69. In this example, dividends weren’t reinvested. If they were, the five-year return on Home Depot shares would have been 198%.

You can read more about dividend compounders here.

Analysts’ price targets

While the two screens above focus on estimates through 2023, ratings and price targets set by analysts who work for brokerage firms are based on 12-month outlooks.

Among the 60 stocks in the S&P 500 consumer discretionary sector, there are 20 with majority “buy” or equivalent ratings, for which the analysts see more than 20% upside over the next year, and only two (the top two) are in the hotel, cruise line, casino or travel services industries:

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