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 (8a) / "Buy Zones" (8b)
- Part 9: Materials
- Part 10: Energy
The Materials sector isn't exactly a breeding ground for good, stable dividend stocks. In fact, it is the only sector that is currently not represented in our portfolio (you'll see why as you read more). The sector has the second highest beta (1.30) and the second lowest 5-year total return (+6.4%) among all of the S&P 500 sectors. You can see the high beta in full effect in the graph below.
Generally speaking, stocks in the Materials sector do not currently rate very well in our system. The analysis above really shows how weak the sector is in general. There are 57 Materials stocks in our universe and only one has a Parsimony rating over 90 and only five have a rating over 80. In fact, the top 5 holdings in the Materials Select Sector SPDR (XLB) all have a Parsimony rating under 70 (three of which have ratings under 50!):
- Monsanto (MON): 61
- E. I. du Pont de Nemours (DD): 36
- Dow Chemical (DOW): 6
- Freeport-McMoRan (FCX): 6
- Praxair Inc. (PX): 58
That said, the table below highlights the top-rated stocks in the sector (with dividend yields over 2.0%). Note that our composite rating ranges from 0 (lowest) to 99 (highest).
The tables below highlight some of the key data points that we analyze when ranking our dividend stocks.
FutureFuel Corp (FF) is a relatively new dividend payer, but the company has paid a consistent quarterly dividend to its shareholders every quarter since going public in March 2011. Despite its short dividend history, we think that FutureFuel could become a great long term dividend stock as the company has very high ratings for Financial Stability (95) and Dividend Sustainability (91).
LyondellBasell (LYB) is one of the world's largest plastics, chemical and refining companies. The company is also a relatively new dividend payer that has a very high ranking for Dividend Sustainability (92). With a modest payout ratio of 29%, we think that the company will continue to increase its dividend in the future.
Bemis Corp (BMS) is one of the few Dividend Aristocrats in the Materials sector. As such, the company has a high Dividend Track Record rating (86). Bemis recently announced a 4% increase to its quarterly cash dividend, marking the 30th consecutive year that the company has increased its dividend payment. The company has been paying an annual dividend on its stock since 1922.
The Materials sector is clearly one of the weakest sectors in the S&P 500 and it definitely showed in our rating system. That said, picking the right stocks in the sector has clearly made all the difference for investors. This is part of the reason why we developed the Parsimony rating system. If you rank all of the stocks in a sector against their peers on a consistent basis, it becomes clear which companies are the strongest and which offer the best investment opportunities going forward.
From an asset allocation standpoint, we believe that your DIY Dividend Portfolio does not need to have exposure to every sector all the time. When a sector is relatively weak and it is difficult to find good opportunities within the sector, it is ok to take a pass. We think that is a very important point to note here.