Building A Do-It-Yourself Dividend Portfolio - Part 7: Industrials

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 |  Includes: CMI, GWW, RTN, UNP, WSO
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 continue highlighting 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 7: Industrials

If you can't tell from the chart below, the Industrials sector is highly correlated with the S&P 500 (and more volatile). The sector has the second highest correlation (0.93) and the third highest beta (1.23) among all the S&P 500 sectors. Unfortunately, the Industrials sector is also one of only 3 sectors with a negative total return over the past 5 years.

Below is a list of our top-rated dividend stocks in the Industrials sector. Note that our composite rating ranges from 0 (lowest) to 99 (highest).

Despite a negative 5-year total return, the sector clearly has several very attractive investment opportunities for DIY dividend investors.

As shown in the table above, these top-rated stocks have an average 5-year total return of 87.0% and an average dividend yield of 2.7%. Raytheon (NYSE:RTN) had the lowest total return, but the company also has the lowest beta (0.69) of the group and the highest dividend yield (4.0%). Watsco Inc (NYSE:WSO) has the second lowest beta (0.88) and also the second highest dividend yield (3.7%).

In general, these Industrial stocks have very high ratings for Financial Stability and Dividend History. W.W. Grainger (NYSE:GWW) has the highest rating in our system for Dividend History (99). Rightly so, as the company is a member of the S&P 500 Dividend Aristocrats club, which have followed a policy of increasing dividends every year for at least 25 years. Also, you will notice that Union Pacific (NYSE:UNP) and Cummins (NYSE:CMI) have very high ratings in Dividend Potential (both 97). Both of these companies have 5-year average payout ratios below 25% and both are expected to grow earnings over 15% per year over the next 5 years. In addition, they both have 10-year average dividend growth rates over 15%. Now those are numbers that dividend growth investors dream about!

Conclusion

Any DIY Dividend Portfolio should include several stocks from the Industrials sector. However, 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.

Note to readers: We will detail our specific "Buy Zones" for these top-rated Industrial stocks in an upcoming article. Also, we will highlight our top-rated stocks in the Materials sector in Part 8 of this series, so please make sure to "follow" us.

Disclosure: I am long GWW, UNP.