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What will be the best dividend stocks in 2011? Where will you put your money? Before the Holidays, I wanted to leave you with my thoughts on a number of different sectors. I am about to restructure my whole dividend portfolio during the holidays (I have plenty of growth, dividends and “gamble” stocks right now). This is why I am doing a review of each sector.

Basic Materials

The basic materials sector is not known for high paying dividend stocks (exception would be Southern Copper (SCCO) at roughly 6%). However, I think this sector could show some growth in a regular investment portfolio. I’m specifically thinking of mining companies operating either in Peru (known for its copper) or Australia (because their economy is booming). They won’t give you much more than 2 – 2.5% in dividends but those stocks can produce some growth.

Communications

As we previously discussed in other articles, there are some high paying dividend stocks in this sector. No wonder the dividend average is over 3.50%. However, with a slow economy, we see several big companies having a hard time keeping their dividend payout ratio under 50%. Companies such as AT&T (T) and Verizon (VZ), have high dividend payouts (over 5%) but important dividend payout ratios too.

When you are running short on your budget, one of the first things you will do is to look at your recurrent expenses. Chances are that consumers will try to reduce their phone bills and could avoid extra services. The same extra services that allow communication companies to make big profits.

Consumer, Cyclical

With an undecided economy, consumer, cyclical could be a very good pick. Some companies are undervalued because investors think we are not coming out of the recession that easily. During 2010, several companies increased their dividends and I think this will occur again in 2011. There are some interesting companies providing dividends over 3% in this sector such as American Eagle Outfitters (AEO) and Brinker International (EAT).

Consumer, Non-Cyclical

Definitely my favorite dividend paying sector. I like it because several companies included in the non-cyclical are as diversified as an ETF or a mutual fund by themselves. Companies such as J&J (JNJ), PG, Pepsi (PEP) and more offer tons of products, are vertically integrated and operate in several countries. This allows them to benefit from economic booms, currency changes while receiving a steady income flow. The second thing I like about this sector is that several companies are still cash rich. So even if dividends were upped last year, you can count on them to do it again in 2011.

Energy

If you think of dividend investing and you are considering energy, you have to go with pipelines. If not, the US energy sector won’t pay much in the way of dividends (you need to cross the border and look at Canadian energy companies for that!). I recently took time to analyze Chevron (CVX), and I think one of its competitors, Exxon Mobil (XOM) is another interesting pick for the future. On the other hand, I would not be tempted to increase my exposure too much in this sector as the price of oil and natural gas and all the risks related to them (remember BP anyone?) can seriously impact the whole sector. New regulation is definitely coming due to the recent disaster.

Financial

This sector is still shaky. We thought we were over 2008 earlier this year but Goldman Sachs’ (GS) legal fight with the SEC reminded us that surprises can arise at any time. You know by now that I am a big fan of Canadian banks, and this is why I will restructure my portfolio with some of them while leaving US financials on the sidelines for now. I don’t like investing in a ticking time bomb.

Industrial

Here again, a pretty low dividend paying sector. If you take out trucking and transportation companies, the dividend picture is pretty bad. On top of that, these 2 sub-sectors could be negatively affected by the price of oil. In 2009 and 2010, most companies benefitted from stimulus programs, so we can think there is a part of “false growth” in this sector too (same for financials!). Industrials will sit back at the movie theater and watch the economy. We all hope they make a successful trilogy out of the first episode!

Technology

Techno stocks are definitely cash rich (just think of Google (GOOG) or Microsoft (MSFT)). But when it comes to dividends, I doubt they will share much from their bank accounts with investors. According to financial theory, if the company finds a better investment than the investors’ yield expectation, they will not issue dividends. This is definitely the case in a fast growing sector such as technology. If you want to add some growth to your portfolio, I think great things are yet to come from techno stocks. And if you want to follow them, I recommend you look at the Intelligent Speculator who is constantly reviewing techno stocks.

Utilities

Last but definitely not the least, utilities should be part of every dividend portfolio. They are very stable and established companies paying high dividends. What else would you want? On top of that, they offer something everybody needs (water, gas, electricity). The fact that each company tries to maintain their dividend payout ratio at the same level (40-60%) makes them harder to analyze but I’ll give it a shot after the Holidays.

Disclosure: No positions

Source: Best Dividend Stocks in 2011 by Sector