Whether you are new to dividend investing or you are a seasoned pro, it's likely that your main goal is to build a long-term portfolio that generates consistent income over time with as little volatility as possible. That said, over the next few weeks we will continue publishing our 10-part series which should help you build your own 6% DIY Dividend Portfolio for 2013.
In part 1, we highlighted the investment plan and strategy for the portfolio and parts 2-10 will highlight each sector in the S&P 500, including high-rated stocks with in each sector that you should consider for your portfolio. Below is a schedule of the entire series. Please make sure to "follow" us so that you will be notified when each new article is published.
- Part 1: Introduction / Investment Plan & Strategy
- Part 2: Consumer Staples (2a) / "Buy Zones" (2b)
- Part 3: Utilities
- Part 4: Healthcare
- Part 5: Consumer Discretionary
- Part 6: Financials
- Part 7: Technology
- Part 8: Industrials
- Part 9: Materials
- Part 10: Energy
As we highlighted in Part 1, just because a stock has a high Parsimony composite rating, it doesn't necessarily mean that you should run out and purchase it that day. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. 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".
Sample "Buy Zones"
Part 2a of the series highlighted some our top-ranked dividend stocks in the Consumer Staples sector.
As a follow up to Part 2a, below are our target "Buy Zones" for each of these top-rated Consumer Staples stocks.
Wal-Mart Stores (WMT) sold off in early November and the stock is currently trading approximately 12% below its recent high. WMT is getting support at its 40-week moving average ($68.57) and we believe that this level will hold given the stock's long-term uptrend. In addition, WMT is trading below 14.0x forward earnings (1/31/13), which we believe is an attractive valuation for the business.
Hormel Foods (HRL) broke out to a new 52-week high recently and we suggest that investors wait for a pullback to open a new position. Prior to breaking out, the stock bounced around between $27.00 and $30.00 and we believe HRL will dip back into that range on any weakness. The company recently announced a 13% increase in its annual dividend and the lower end of our "Buy Zone" would give you a yield-on-cost of close to 2.5%.
General Mills (GIS) also hit a new 52-week high recently and we don't think that investors should chase the stock here. We are targeting an 8-10% pullback from current levels, which we believe would be a great low-risk entry point. At the low-end of our "Buy Zone", the stock would have a forward P/E multiple of approximately 14.0x and a yield-on-cost of 3.5%.
Kimberly Clark (KMB) has bounced around between $82.00 and $88.00 over the past six months, but the stock has failed to make a new high on the last two rallies. That said, we think KMB could test its 40-week moving average ($81.37) in the coming months and we would be a buyer if the stock dipped below this level. The company has a nice dividend yield of 3.5% and it has increased its dividend for 40 consecutive years.
Colgate Palmolive (CL) has also traded in a short-term range ($102.00-$108.00) over the past six months. As with all of these stocks, the long-term trend is very strong, but we would like the stock to pullback a bit more before pulling the trigger. We are targeting an 8-10% total pullback for CL from its recent high, which we believe will be a low-risk entry point for long-term investors. At the low-end of our "Buy Zone", the stock would have a forward P/E multiple of approximately 18.5x and a yield-on-cost of 2.5%.
Cash-Secured Put Analysis
We often use a cash secured put strategy to generate income while we patiently wait for the "Buy Zones" on high-rated stocks that we are stalking (see Part 1 for further details). We try to make sure our break-even price on the option trade is in or below our target "Buy Zone". In other words, a cash-secured put is like putting in a limit order to buy a stock at a lower price ... except that you get paid for it!
On average, the options below have a 3-5 month premium (income) yield of 2.4% with a margin of safety of 6.1%. Note: We prefer utilizing options with expiration dates that are at least three months out to reduce trading costs.
Investors should consider all of these great stocks for their DIY Dividend Portfolio, but please be patient with your entry points.
That said, Wal-Mart is currently in the "Buy Zone". Feel free to pull the trigger on that stock immediately. Investors should use their discretion with the other stocks in the short-term as we believe these stocks will eventually hit our "Buy Zones".
Good luck out there ... be safe!
Please make sure to "follow" us as we will be continuing this series over the coming weeks.
Disclosure: I am long WMT.