Building A 6% Income Portfolio For 2013 (Part 4b): Healthcare 'Buy Zones'

Includes: AMGN, BAX, BMY, OMI, STE
by: Parsimony Investment Research

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 within 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.

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 4a of the series highlighted some our top-ranked dividend stocks in the Healthcare sector.

As a follow up to Part 4a, below are our target "Buy Zones" for each of these top-rated Healthcare stocks.

Baxter International (NYSE:BAX) broke out of a range in October 2012 and the stock really hasn't looked back since. The company announced a 34% increase in its quarterly dividend back in July 2012, which ignited the current 40%+ rally in the stock. We think Baxter is a great stock to own in a long-term DIY Dividend Portfolio, but we would wait for a pullback into the low $60s (at which point the dividend yield would be approaching 3.0%).

Amgen Inc. (NASDAQ:AMGN) is up over 90% since troughing in August 2011, which is right around the time the company paid its first dividend. Coincidence? We think not. Amgen will likely continue to increase its dividend at a pretty aggressive pace for the next few years and investors should definitely consider purchasing the stock on a dip. We are targeting an 8%-12% pullback for a low-risk entry point (which equates to a price range of $80.00-$83.00).

Steris Corp. (NYSE:STE) broke above $32.00 in August 2012 and the stock has stayed above that level ever since. The 40-week moving average held as support on a pullback in early November and we expect the stock to continue this upward trend. The company has increased its dividend at a compound annual rate of 27% over the past 5 years and its definitely worth taking a look at in the low $30s.

The $31.00 level held as support for Bristol Myers Squibb (NYSE:BMY) all throughout 2012. We actually pulled the trigger on the stock for the Model DIY Dividend Portfolio around $32.00 in late December. BMY has a great yield (4.1%) and investors should continue targeting the $31.00-$33.00 range as a long-term, low-risk entry point.

Owens & Minor (NYSE:OMI) has bounced around in the $27.00-$31.00 range for the past 18 months. We purchased the stock around $27.75 for the Model Portfolio back in August 2012 and as expected it was up around $31.00 again within a few months. Until the stock breaks out of this range, consider $27.00-$29.00 a good entry point. The company has consistently increased its dividend at a compound annual rate of 15.7% over the past 10 years and it would be a great addition to your portfolio.


Building a DIY Dividend Portfolio is a marathon, not a sprint. Don't put pressure on yourself to have a fully diversified portfolio overnight. The various sectors will offer good buying opportunities at different times; you just need to recognize them when they are there. Stocks in Healthcare sector have low relative betas and will tend to be less volatile than the general market, which will help dampen overall portfolio volatility. In addition, most of these stocks are financially sound and have long and stable dividend histories. Sounds like a good combination for a DIY Dividend Portfolio!

Disclosure: I am long BMY, OMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.