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 (7a) / "Buy Zones" (7b)
- 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 7a of the series highlighted some our top-ranked dividend stocks in the Technology sector.
As a follow up to Part 7a, below are our target "Buy Zones" for each of these top-rated Technology stocks.
Accenture (ACN) is up over 50% from its recent low in August 2011. ACN has been a great dividend growth stock and it has grown its dividend at a compound annual rate of 13.3% over the past 10 years. The stock recently hit another 52-week high and we will be patiently waiting for healthy pullback before pulling the trigger on this one. We think that the $65.00-$68.00 range would be a good low-risk entry point.
Automatic Data Processing (ADP) is up over 40% from its low in August 2011 and the stock is in a great long-term uptrend. ADP just hit another 52-week high recently and we will be patiently waiting for a dip to buy some shares. The stock has made a series of higher highs and higher lows, which is a sign of a strong trend. As shown in the chart above, ADP tend to briefly dip below its 40-week moving average before heading higher again. We'll have cash ready the next time this happens.
International Business Machines (IBM) has been trading in a range for the past 12 months and we believe that the stock could test the low end of this range ($180.00-$190.00) before heading higher again. IBM has increased its dividend to shareholders at a compound annual rate of 18% over the past 5 years and it has proven to be a great dividend growth stock.
Seagate Technology (STX) dipped into our "Buy Zone" back in November before rallying over almost 40% to a new 52-week high. This stock tends to be volatile and we believe that investors will get another chance to purchase some shares on the next big pullback. Seagate has excellent ratings for Financial Stability (98) and Dividend Sustainability (84) and the company currently has a very attractive dividend yield (4.4%). This is definitely a stock to keep on your radar.
As you can see Apple Inc. (AAPL) is actually trading below our "Buy Zone". We believe that this stock is severely oversold. Apple's investor base has been shifting from momentum-focused growth investors to value-oriented dividend investors. As previously discussed, we believe that Apple will be announcing a big dividend hike soon that could send shares much higher. That will certainly be the catalyst that gets this stock back on track.
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.
Disclosure: I am long AAPL.