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.
- Part 1: Introduction / Investment Plan and Strategy
- Part 2: Consumer Staples (2a) / "Buy Zones" (2b)
- Part 3: Utilities (3a) / "Buy Zones" (3b)
- Part 4: Healthcare (4a) / "Buy Zones" (4b)
- Part 5: Consumer Discretionary (5a) / "Buy Zones" (5b)
- Part 6: Financials (6a) / "Buy Zones" (6b)
- 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 6a of the series highlighted some of our top-ranked dividend stocks in the Financials sector.
As a follow up to Part 6a, below are our target "Buy Zones" for each of these top-rated Financial stocks.
Main Street Capital (MAIN) is up almost 100% since October 2011 and we think that the stock is due for a breather. MAIN has increased its dividend at a compound annual rate of 38% over the past 5 years. The company has a very attractive dividend yield (5.6%) and it has delivered shareholders a 287% total return over the past 5 years. This is definitely a stock to consider for your portfolio on a pullback and we think that the $26.00-$28.00 range could be a good entry point.
Although Arthur J Gallagher (AJG) broke out of a range a few weeks ago, we believe that the stock could test the bottom end of that range again before heading too much higher. At the low end of the range ($34.00), the stock's yield would be around 4.0% and we think that would be a great entry point for a long-term investor.
Aflac Inc. (AFL) is down over 6% since reporting softer than expected Q4 earnings last week. Margins have been negatively impacted by the weakness in the yen as the company generates the majority of its revenues in Japan. That said, we believe that this could be a great long-term buying opportunity for investors. Aflac is one of only a handful of stocks that has a sub-rating over 90 in 3 of our 5 sub-rating categories (Dividend Track Record, Financial Stability, and Dividend Sustainability).
Omega Healthcare Investors (OHI) is up over 85% since its recent trough in October 2011. That said, we are targeting a 10-15% pullback in the stock and we would be a buyer below $24.00 (at which point the stock would be yielding over 7.5%). OHI is one of several "high-yield" stocks that we are actively stalking right now and we'll be ready to pounce when the time is right.
HCP Inc. (HCP) is up over 65% from its low in August 2011, but the stock has been consolidating in the mid to low-$40s for about 6 months now. That said, we would certainly be a buyer at the low end of this range ($42.00-$44.00) on a pullback. HCP was the first healthcare REIT selected to the S&P 500 index, it has increased its dividend per share for 27 consecutive years, and it is the only REIT included in the S&P 500 Dividend Aristocrats index.
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.