Building A Do-It-Yourself Dividend Portfolio - Part 3: Healthcare

Includes: ABT, BDX, BMY, JNJ, OMI
by: Parsimony Investment Research

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 links for previous articles):

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.

Rating Methodology

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:

  1. Risk-Reward Profile (e.g., current yield, Calmar ratio)
  2. Financial Stability (e.g., sales and EPS growth, ROE, leverage)
  3. Dividend History (e.g., historical dividend stability and growth)
  4. Future Dividend Potential (e.g., payout ratio, EPS estimates)
  5. 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 3: Healthcare

The Healthcare sector shares two key attributes with its "defensive" brethren (Consumer Staples and Utilities): low beta and low volatility. Of the nine sectors in the S&P 500, the Healthcare sector has the third lowest average beta (0.65) and the second lowest maximum drawdown over the past 5 years (-39.2%). As a matter of fact, the three "defensive" sectors are the only three sectors with a beta under 1.0.

As you can see in the chart above, the Healthcare sector has consistently outperformed the broader market over the past 5 years (albeit by a small margin) and it has done so with lower downside volatility. Higher total return and lower downside volatility is the exact recipe that you should try to cook up in your DIY Dividend Portfolio and adding some high-quality stocks from the Healthcare sector should help you achieve this.

That said, below is a list of our top-rated dividend stocks in the Healthcare 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 3.4% and an average beta of 0.47. However, it's interesting to note that these 5 top-rated stocks significantly outperformed the sector as a whole over the past 5 years, with an average total return of 23.1%. Bristol-Myers Squibb (NYSE:BMY) and Owens & Minor (NYSE:OMI) led the way with total returns over 30%. Clearly, picking the right stocks in the sector has made all the difference for investors. We can't stress this point enough!

When analyzing the sub-ratings for each stock, you can see that the top-rated stocks in the Healthcare sector generally have very strong ratings for Financial Stability and Dividend History as well as very respectable Risk-Reward ratings. As a matter of fact, Abbott Laboratories (NYSE:ABT), Becton Dickinson (NYSE:BDX), and Johnson & Johnson (NYSE:JNJ) are all members of the S&P 500 Dividend Aristocrats club, which have followed a policy of increasing dividends every year for at least 25 years.


Any DIY Dividend Portfolio should include several stocks from the Healthcare sector. Stocks in this sector have low relative betas and will tend to be less volatile than the general market, which will help dampen overall portfolio volatility. In addition, most of these stocks are financially sound and have long and stable dividend histories. Sounds like a good combination for a DIY Dividend Portfolio!

Note to readers: We will detail our specific "Buy Zones" for these top-rated Healthcare stocks in a future article. Also, we will highlight our top-rated stocks in the Consumer Discretionary sector in Part 4 of this please make sure to "follow" us.

Disclosure: I am long ABT, JNJ, BMY.