Building A 6% Income Portfolio For 2013 (Part 10b): Energy Sector 'Buy Zones'

Includes: CLMT, HFC, KMP, PAA, SXL
by: Parsimony Investment Research

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 past few months we published a 10-part series that should help you build your own 6% DIY Dividend Portfolio for 2013 (see links below).

In part 1, we highlighted the investment plan and strategy for the portfolio and parts 2-10 highlighted 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.

As we highlighted in Part 1, 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 believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. We call these entry points our "Buy Zones" and they are points at which long-term dividend investors should feel comfortable starting to build a position in the respective stocks. We focus on four key levels of support when determining a "Buy Zone":

  • Technical - Support from short and long-term trend lines (i.e, 10-week and 40-week moving average).
  • Volatility - Target correction levels based on historical volatility and maximum draw down.
  • Valuation - Support levels based on historical valuation multiple.
  • Yield - Support levels based on forward dividend yield.

We then average the low end and the high end of these key support levels to determine our target "Buy Zone."

It should be noted that this is how we determine our "Buy Zones," but there are no right or wrong answers here. We encourage investors to think hard about the key levels of support for their own stocks. What is the valuation level that you would feel comfortable buying a certain stock? What yield level makes sense for you? Also, you may want to add different parameters that fit your investment style better. The key takeaway here is that you establish a consistent process for determining a "Buy Zone."

Sample "Buy Zones"

Part 10a of the series highlighted some our top-ranked dividend stocks in the Energy sector.

As a follow up to Part 10a, below are our target "Buy Zones" for each of these top-rated Energy stocks.

HollyFrontier Corp. (NYSE:HFC) is now down over 20% from its recent high and the stock is currently in our Buy Zone ($44.00-$48.00). Refining companies are well off of their highs due to fears that the narrowing "crack spread" will put pressure on margins in the coming quarters. However, HFC has declared 8 special dividends in the last 18 months…in addition to increasing its regular dividend 5 times (raising it a total of 300%) over this period. Combined with its special dividends (which have been very consistent due to its LP and GP interests), HFC's actual dividend yield is north of 7.0%!

Sunoco Logistics Partners (NYSE:SXL) is up over 100% from its recent low in June 2012 and the stock remains in a strong long-term uptrend. SXL has increased its distribution for 32 consecutive quarters and it is definitely a stock that we would like to own in our DIY Dividend Portfolio. That said, SXL has been consolidating for about three months now and we would like to see the stock pull back a bit further before starting a position.

Calumet Specialty Products (NASDAQ:CLMT) briefly pulled back into our Buy Zone a few weeks ago, but we didn't pull the trigger. However, if we get another bite at the apple over the next few months, we won't be so slow on the draw. This is a another stock that we definitely want to own longer term. The company has a very attractive yield over 7.0% and it has increased its distributions for 11 consecutive quarters.

Kinder Morgan Energy (NYSE:KMP) is one our largest holdings in the Energy sector. The stock is currently down about 10% from its recent high and if it dips any further we plan to add to our position. KMP has increased its distributions to shareholders in 12 of the past 13 quarters.

Plains All American (NYSE:PAA) has increased its quarterly distribution to limited partners in 34 out of the past 36 quarters and consecutively in each of the past 15 quarters. Large cap diversified MLPs (like PAA) are very "utility-like" in that they tend to deliver stable and consistent income in any market environment. That said, we would love to see PAA pull back to its 40-week moving average (~$50.00) before opening a position, but we aren't holding our breath.


Building a DIY Dividend Portfolio is a marathon, not a sprint. Don't put pressure on yourself to have a fully diversified portfolio overnight. The various sectors will offer good buying opportunities at different times; you just need to recognize them when they are there.

Disclosure: I am long HFC, KMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.