In Part 1 of this series, we highlighted 5 low beta dividend stocks for retirees to consider post election. This article is focused on establishing a "Buy Zone" for each of these stocks.
With the fiscal cliff and tax increases looming over our heads, it now more important than ever to stick to your investment plan. In the current market environment, it is important for income investors to choose their dividend stocks wisely as they are putting new money to work. As volatility increases (especially downside volatility), investors may want to add some low beta stocks to their holdings to help dampen portfolio volatility. In general, companies with low betas will tend to be less volatile than the general market. That said, any pullback in the market should be an opportunity to add to your low-beta dividend stock positions.
As discussed in Part 1, we created a rating system that ranks over 700 U.S. dividend stocks on a monthly basis. Our composite ratings are derived by ranking each stock based on 28 key fundamental and technical data points in five sub-rating categories: Risk-Reward Profile, Financial Stability, Dividend Track Record, Dividend Sustainability, and Relative Strength. Our overall rating and each sub-category rating range from 1 (lowest) to 99 (highest). When choosing investments for our "model" DIY Dividend Portfolio, we tend to target stocks with an overall rating of at least 80.
Based on our ratings, we recommended that retirees consider the following stocks for their portfolio (all of which have an overall Parsimony rating of at least 90 and a 5-year beta under 0.50).
What Is A "Buy Zone"?
As we highlighted above, once we have decided that we want to purchase a particular stock, we look for a low-risk entry point to open the position. We call these entry points our "Buy Zones" and they are points at which long-term dividend investors should feel comfortable starting to build a position in the respective stocks. We focus on four key levels of support when determining a "Buy Zone":
- Technical - Support from short and long-term trend lines (i.e, 10-week and 40-week moving average).
- Volatility - Target correction levels based on historical volatility and maximum draw down.
- Valuation - Support levels based on historical valuation multiple.
- Yield - Support levels based on forward dividend yield.
We then average the low end and the high end of these key support levels to determine our target "Buy Zone".
It should be noted that this is how we determine our "Buy Zones", but there are no right or wrong answers here. We encourage investors to think hard about the key levels of support for their own stocks. What is the valuation level that you would feel comfortable buying a certain stock? What yield level makes sense for you? Also, you may want to add different parameters that fit your investment style better. The key takeaway here is that you establish a consistent process for determining a "Buy Zone". Finding low-risk entry points for your stocks will drastically improve your odds of investment success.
"Buy Zone" Examples
Below are specific "Buy Zones" for the stock mentioned above.
Although some uncertainty remains regarding Abbott Laboratories' (ABT) upcoming planned spin-off of Abbvie, we believe that ABT remains a must-hold stock for a long-term retirement portfolio. The company has grown revenues and earnings at a compound annual rate of 10.4% and 19.8%, respectively over the past 5 years. In addition, Abbott has paid a stable dividend for well over 25 years now. The stock is down about 13% from its recent peak and it appears to be getting some support at the 40-week moving average. From a valuation perspective, the stock is now trading around 12.5x forward earnings, which is very cheap by historical standards. Buy Zone: $61.00-$63.00
Altria Group (MO) is down over 16% from its recent peak and we believe that this is a great place to start accumulating the stock. The company has an above-average current dividend yield (5.7%), which has helped the company deliver an average annual total return of around 15% to shareholders over the past 5 years. From a valuation perspective, the stock is now trading around 13.8x forward earnings, which is also very cheap by historical standards. Buy Zone: $31.00-$33.00
General Mills (GIS) isn't ripe for the picking yet, but it is certainly getting closer. GIS is a great dividend growth stock that we would love to buy on a dip. The company has increased its dividend at a compound annual rate of 11.0% over the past 5 years, which has helped deliver an average annual total return of 10.1% to shareholders over that same period. From a valuation perspective, the stock is now trading around 15.0x forward earnings, which is inline with its historical average. The stock is only down about 3% from its recent high and we would like to see a pullback of at least 8% before buying. Buy Zone: $37.00-$38.00
Kinder Morgan Energy Partners (KMP) is one of our favorite MLPs and it now has a current yield of 6.6%. We have been targeting a 15% correction in the stock and it looks like we finally got it. KMP shareholders have enjoyed a 5-year total return of 122%, with a maximum drawdown of only 28% over that period. To put that in perspective, the average maximum drawdown over the past 5 years for all the stocks in our dividend universe is over 61% (more than double KMP's drawdown). We just added KMP to our "Model" DIY Dividend Portfolio this week. Buy Zone: $77.00-$79.00
McDonald's Corp (MCD) has been beaten down lately based on fears of slower growth. However, the stock carries our highest possible rating for Dividend Track Record (99) and we believe that it is still a great long-term stock for a DIY Dividend Portfolio. MCD has produced a respectable 5-year total return of 73%, with a very conservative maximum drawdown of 21%. Even more impressive is the fact that the company has increased its dividend at a compound annual rate of 28% over the past 10 years! MCD is probably one of the best dividend growth stocks of all time. The stock has now traded through the low end of our Buy Zone and we think that MCD is a phenomenal long-term buy at current levels. See our recent article on MCD for more analysis. Buy Zone: $87.00-$90.00
Patience. Patience. Patience.
We passionately believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. DIY Dividend Investors can determine target "Buy Zones" for any stock that they are considering by analyzing the stock's key support levels that we discussed above.
Remember that dividend investing is a marathon, not a sprint!