We Are DIY Investors...Just Like You
By way of background, Parsimony Investment Research is a group of Do-It-Yourself investors that whole-heartedly believe that individuals can and should educate themselves and manage their own money. That is, of course, if you are willing to dedicate the time and patience necessary to do so. In today's low interest rate environment, paying even modest fees to a financial advisor can significantly eat into your profits. At the end of the day, it's YOUR money and you alone are the best shepherd of your capital.
We started Parsimony to share our experiences, strategies and research with fellow DIY investors. At the end of the day, we are all in the same boat…so let's set sail and preserve and grow our wealth together!
Building A DIY Dividend Portfolio
Over the course of the next few weeks, we are going to highlight our top-ranked dividend stocks within each of the sectors below (see linksfor previous articles):
- Part 1: Consumer Staples
- Part 1b: Consumer Staples "Buy Zones"
- Part 2: Utilities
- Part 3: Healthcare
- Part 4: Consumer Discretionary
- Part 5: Financials
- Part 6: Technology
- Part 7: Industrials
- Part 8: Materials
- Part 9: Energy
Our goal is to provide fellow investors with a diversified pool of high-quality dividend stocks that we feel have the potential to be a core holding in your DIY Dividend Portfolio.
We use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. For dividend stocks in particular, we have a proprietary rating system that ranks over 700 U.S. dividend stocks on a weekly basis.
Our composite rating is derived by ranking each stock based on 28 key fundamental and technical data points in five sub-rating categories:
- Risk-Reward Profile (e.g., current yield, Calmar ratio)
- Financial Stability (e.g., sales and EPS growth, ROE, leverage)
- Dividend History (e.g., historical dividend stability and growth)
- Future Dividend Potential (e.g., payout ratio, EPS estimates)
- Relative Strength (e.g., 12-month total return and trends)
It should be noted that we also believe that patience is a virtue. 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 scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results.
Part 2: Utilities
While the Utilities sector has barely kept pace with the broader market over the past 5 years, it has by far the highest average dividend yield (3.8%) of any sector in the S&P 500.
From a risk-reward perspective, the Utilities sectors has the lowest average beta (0.50) of any sector in the S&P 500. Stocks with low betas tend to be less volatile than the general market, which will help dampen overall portfolio volatility.
That said, below is a list of our top-rated dividend stocks in the Utilities sector. Note that our composite rating ranges from 0 (lowest) to 99 (highest).
True to form for the sector, the stocks on the list above have an average dividend yield of 3.9% and an average beta of 0.36. However, it's interesting to note that these 5 stocks significantly outperformed the sector as a whole over the past 5 years, with an average total return of 54.4%. Clearly, picking the right stocks in the sector has made all the difference for investors.
We love analyzing the sub-rating categories of the Parsimony rating (see table above) because it gives you meaningful insight about the strengths of the individual stocks. The sub-ratings also give you good insight into the sector as a whole. Generally speaking, the Utilities sector is one of the few sectors that has less than 5 stocks with a Parsimony rating of 90 or better (there are only 3). The reason for this is clear when you see how weak the average ratings are for Financial Stability, Dividend Potential, and Relative Strength.
That said, the stocks above have very strong Risk-Reward and Dividend History ratings, which are the two sub-categories that have the highest weightings in the overall Parsimony rating.
We like to look at maximum drawdown (which is one of the key factors in the risk-reward sub-rating) to help us quantify the downside risk of an investment. Below are the maximum drawdowns for the stocks above over the past 5 years:
- Southern Company (NYSE:SO): -30.4%
- Cleco Corporation (NYSE:CNL): -29.7
- Wisconsin Energy (NYSE:WEC): -24.3%
- Consolidated Edison (NYSE:ED): -30.1%
- Vectren Corporation (NYSE:VVC): -40.8%
The average maximum drawdown for our top-rated stocks is -31.1%, which is significantly lower than the maximum drawdown for the sector as a whole (-46.5%). This is a very compelling statistic when you account for the fact that our top-rated stocks also have a much higher 5-year total return.
In general, Parsimony ratings for the Utility sector as a whole are relatively low, but there are definitely some companies that have pulled ahead of the rest of the pack. While we believe that all DIY Dividend Portfolios should have a few Utility stocks sprinkled in, its critical to choose your investments in the sector very carefully.
Note to readers: We will detail our specific "Buy Zones" for these top-rated Utility stocks in a future article. Also, we will highlight our top-rated stocks in the Healthcare sector in Part 3 of this series...so please make sure to "follow" us.