Top Holdings Of Dividend ETFs (Part 2: The Top 10 By Sector)

|
Includes: AAPL, ABBV, AEP, AMGN, APD, BA, BAC, CMCSA, CSCO, CTL, CVS, CVX, D, DIS, DTE, ECL, EPD, F, FRT, HD, IBM, INTC, IPG, ITW, JNJ, JPM, KMB, KO, KSS, LMT, M, MCD, MMM, MO, MRK, MSFT, NNN, O, OKE, OMC, PEP, PFE, PG, PM, PNC, PPG, QCOM, SBUX, SHW, SKT, SPG, T, TGT, TJX, TXN, UNH, UNP, UTX, V, VZ, WBA, WFC, WMT, XOM
by: FerdiS
Summary

From time to time, I compile a virtual portfolio consisting of the top 50 holdings of dividend ETFs.

Part 1 presented the top 50 holdings for November 2018, ranked by using a proportional scoring system favoring larger investments and larger ETFs.

In Part 2, I'm showcasing the top 10 stocks in each GICS sector. I present F.A.S.T. Graphs charts for select candidates worthy of further analysis and possible investment.

In Part 1 of this article, I presented a virtual portfolio of the top holdings of 47 dividend ETFs. Using a proportional scoring system that favors larger investments and larger ETFs, I calculate an aggregate score for each ticker in the top 25 holdings of the dividend ETFs. Sorting the aggregate scores in descending order determines the rank of each stock (ticker).

Exxon Mobil (XOM) is the highest ranked stock, followed by Apple (AAPL) and Microsoft (MSFT). XOM appeared in the top 25 holdings of 23 ETFs, whereas AAPL and MSFT appeared in 15 of the ETFs.

The top 50 holdings are not distributed evenly among the 11 GICS sectors. In fact, not a single Materials sector stock is present in the top 50 holdings:

For investors looking to build a diversified portfolio, this uneven distribution is not very helpful.

In Part 2 of this article, I'm presenting the top 10 stocks in each GICS sector regardless of overall ranking. Seeing the top 10 stocks in each sector, along with key ratings and metrics, is quite useful, in my view, and should give readers additional insight into the holdings of dividend ETFs.

The New GICS Sectors

The Global Industry Classification Standards (GICS) is a classification system developed in 1999 by MSCI and S&P Dow Jones Indices. GICS is a four-tiered, hierarchical industry classification system consisting of 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries:

Source: MSCI

On 28 September 2018, some significant changes to the GICS were implemented. Most notably, the Telecommunications Services sector expanded to become the Communications Services sector and now includes some stocks previously classified as Information Technology and Consumer Discretionary stocks.

The changes affect more than 10% of the S&P 500 Index market cap. The changes boost the presence of Communication Services and reduce the weight of the Information Technology and Consumer Discretionary sectors in the S&P 500 Index.

Here are the new sectors and their estimated weights as a percentage of the S&P 500:

  1. Communication Services (10.2%) - previously Telecommunication Services (1.9%)
  2. Consumer Discretionary (10.0%, down from 12.7%)
  3. Consumer Staples (6.9%)
  4. Energy (6.2%)
  5. Financials (14.1%)
  6. Health Care (14.5%)
  7. Industrials (9.9%)
  8. Information Technology (20.1%, down from 25.6%)
  9. Materials (2.6%)
  10. Real Estate (2.8%)
  11. Utilities (2.9%)

In this and future articles, I'll be using the new GICS sectors.

Top Holdings By Sector

Below I present the top 10 ranked stocks for each of the new GICS sectors.

In the first table, Rank is the stock's position when ranked by aggregate score. Cells in the Rank column are highlighted for stocks in the top 50 holdings. Freq indicates the number of dividend ETFs containing Ticker in their top 25 holdings. Years are the number of consecutive years of dividend increases; Yield is the dividend yield for a recent Price per share; and 5-DGR is the compound annual dividend growth rate over a 5-year period, where available.

Finally, M*FV is Morningstar's Fair Value Estimate, which I'm including to help readers with a superficial value assessment. Stocks trading below Morningstar's fair value estimate are highlighted in the price column.

Note that I've highlighted stocks I own in the Ticker column.

The second table for each sector presents key ratings and metrics from various sources:

1. Communication Services

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Verizon Communications (VZ)

BBB+

A++

1

88

53%

0.50

3.6

Narrow

AT&T (T)

BBB

A++

1

55

58%

0.42

1.6

Narrow

Comcast (CMCSA)

A-

A

2

91

32%

1.34

4.6

Wide

CenturyLink (CTL)

BB

B

3

3

30%

0.95

2.6

None

Walt Disney (DIS)

A+

A++

1

99

24%

1.18

4.6

Wide

Meredith (MDP)

B+

B++

3

62

77%

1.15

2.2

Narrow

Interpublic (IPG)

BBB

B++

3

55

47%

1.06

4.4

Narrow

Viacom (VIAB)

BBB-

B+

3

54

19%

1.36

3.6

Narrow

Telephone and Data Systems (TDS)

BB

n/a

n/a

56

63%

0.64

2.8

None

Omnicom (OMC)

BBB+

B++

2

87

43%

0.76

4.4

Narrow

I own four of the Communication Services sector stocks and these happen to be in the top 50. All but VZ are trading below Morningstar's fair value. Of the stocks I don't own, IPG and OMC pique my interest. Both yield more than 3% and have double-digit dividend growth rates.

Here are charts from F.A.S.T. Graphs for IPG and OMC. In the charts, the black line represents the share price and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the timeframe in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart).

IPG's price line (black) is below the primary valuation line (orange) and below the stock's normal P/E ratio (blue). The stock appears to be trading below fair value. An investment in IPG in January 2009 would have returned 21.3% on an annualized basis (with dividends included).

OMC also is trading below fair value, as its price line is below both the primary valuation line and the stock's normal P/E ratio. An investment in OMC in January 2009 would have returned 13.2% on an annualized basis (with dividends included).

2. Consumer Discretionary

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Home Depot (HD)

A

A++

1

94

43%

1.29

4.8

Wide

McDonald's (MCD)

BBB+

A++

1

81

53%

0.52

4.8

Wide

Kohl's (KSS)

BBB-

A

3

49

44%

1.19

3.2

None

Macy's (M)

BBB-

B+

3

50

35%

0.97

2.4

None

Ford Motor (F)

BBB

B+

3

41

43%

0.67

2.8

None

Starbucks (SBUX)

BBB+

A++

1

73

56%

0.49

4.6

Wide

Target (TGT)

A

A

3

76

47%

0.75

4.2

None

L Brands (LB)

BB

B+

3

8

86%

0.34

1.8

Narrow

Cracker Barrel Old Country Store (CBRL)

n/a

n/a

n/a

75

55%

0.46

3.6

Narrow

TJX (TJX)

A+

A++

1

86

29%

0.78

4.4

Narrow

I own three of the Consumer Discretionary sector stocks in the top 50 and two stocks outside the top 50. Five stocks trade below Morningstar's fair value. Of the stocks I don't own, TGT looks the most interesting. The stock yields 3.7% and has a 5-year DGR of 13.1%. While TGT seems to be trading at about fair value, I think a look at the stock is warranted.

I previously owned TGT but sold my shares last year to harvest tax losses. Unfortunately, TGT exploded higher shortly thereafter and I've been waiting since then to reopen a position. It looks like the opportunity may have arrived!

Recently, TGT's price line dropped below both the primary valuation line and the stock's normal P/E ratio, so it appears that TGT is now discounted. An investment in TGT in January 2009 would have returned 9.4% on an annualized basis (with dividends included).

3. Consumer Staples

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Procter & Gamble (PG)

AA-

A++

1

98

66%

0.33

4.2

Wide

Coca-Cola (KO)

A+

A++

1

91

75%

0.58

4.0

Wide

Walmart (WMT)

AA

A++

1

82

43%

0.42

3.8

Wide

Altria (MO)

A-

B++

2

85

72%

0.47

3.6

Wide

PepsiCo (PEP)

A+

A++

1

96

63%

0.53

4.2

Wide

Philip Morris International (PM)

A

B++

2

70

85%

0.52

3.2

Wide

Costco Wholesale (COST)

A+

A+

1

98

31%

0.91

4.4

Wide

Kimberly-Clark (KMB)

A

A++

1

87

60%

0.78

4.0

Narrow

Walgreens Boots Alliance (WBA)

BBB

A+

2

90

27%

0.70

3.6

None

Vector (VGR)

B

n/a

n/a

10

341%

0.46

1.2

Narrow

I own four of the six Consumer Staples sector stocks in the top 50 and one stock that is not in the top 50 (WBA). All but two stocks trade below Morningstar's fair value. Of the stocks I don't own, PEP and perhaps KMB are worth a look. PEP yields 3.22% and has a 5-year DGR of 8.5%, while KMB yields 3.61% and has a 5-year DGR of 6.5%.

PEP's price line is above the primary valuation line and also above the stock's normal P/E ratio. Based on the correlation of price and earnings presented in the chart, the stock still seems to be trading above fair value. Note, however, that Morningstar's fair value is above the TGT's current price. An investment in PEP in January 2009 would have returned 9.9% on an annualized basis (with dividends included).

KMB appears to be trading at about fair value, though, again, Morningstar's fair value indicates that KMB is somewhat discounted. In the chart above, KMB's price line is above the primary valuation line but at the stock's normal P/E ratio. An investment in KMB in January 2009 would have returned 10.5% on an annualized basis (with dividends included).

4. Energy

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Exxon Mobil (XOM)

AA+

A++

1

90

73%

0.90

3.8

Narrow

Chevron (CVX)

AA-

A++

1

87

65%

1.05

3.8

Narrow

ONEOK (OKE)

BBB

n/a

n/a

55

77%

0.75

3.2

Narrow

Occidental Petroleum (OXY)

A

A

3

74

108%

0.74

3.8

None

Targa Resources (TRGP)

BB

n/a

n/a

18

83%

1.83

1.0

None

Williams (WMB)

BBB

B+

3

46

64%

1.37

2.6

Narrow

Enterprise Products Partners (EPD)

BBB+

B+

3

79

66%

0.79

3.6

Wide

TransCanada (TRP)

BBB+

B++

3

61

46%

0.52

3.4

n/a

ConocoPhillips Alliance (COP)

A

B++

3

61

29%

1.16

4.6

Narrow

Enbridge Energy Management (EEQ)

n/a

n/a

n/a

n/a

n/a

0.91

2.4

None

I own only one of the three Energy sector stocks in the top 50 and it happens to be the top-ranked stock, XOM. In fact, with only two Energy sector stocks in my DivGro portfolio, I'm looking to add a few Energy sector stocks.

At a glance, the best candidates appear to be CVX and EPD. CVX's dividend safety score is Very Safe, and the stock's other ratings and metrics are quite impressive. EPD is an MLP (master limited partnership) offering a very attractive yield of 6.55% and a good track record of regular distribution increases. The distribution is deemed Safe by Simply Safe Dividends.

OXY looks interesting too, but the stock is trading above fair value based on Morningstar's analysis.

CVX's price line is right at the primary valuation line and the stock's normal P/E ratio, so CVX appears to be trading at about fair value. However, Morningstar's fair value suggests that CVX is discounted by as much as 16%. An investment in CVX in January 2009 would have returned 7.6% on an annualized basis (with dividends included).

For MLPs, I like to look at the correlation between price and distributions to get a quick sense of valuation. EPD's price line is right at the distributions line, so the stock appears to be trading at about fair value. However, Morningstar considers EPD to be significantly discounted. An investment in EPD in January 2009 would have returned 14.5% on an annualized basis (with dividends included).

5. Financials

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

JPMorgan Chase (JPM)

A-

A+

2

73

29%

1.03

3.8

Narrow

Wells Fargo (WFC)

A-

A

2

65

38%

0.89

3.0

Wide

Bank of America (BAC)

A-

B+

3

80

21%

1.30

3.2

Narrow

Old Republic International (ORI)

BBB+

n/a

n/a

74

44%

1.07

4.6

None

Cincinnati Financial (CINF)

BBB+

B++

2

78

63%

0.70

4.4

Narrow

Mercury General (MCY)

n/a

n/a

n/a

39

113%

0.27

2.8

None

Franklin Resources (BEN)

A+

A++

2

99

27%

1.38

2.2

Narrow

Citigroup (C)

BBB+

B++

3

72

23%

1.34

3.4

Narrow

Erie Indemnity (ERIE)

n/a

n/a

n/a

80

68%

0.41

4.4

Narrow

PNC Financial Services (PNC)

A-

A

2

73

31%

0.86

4.2

None

I don't own any of the top 10 Financials sector stocks, but I do own five other Financials sector stocks in my DivGro portfolio. Seven stocks trade below Morningstar's fair value. I think JPM looks interesting here, though BEN and PNC may be worth considering, too.

Except for Dividend.com's DARS rating, BEN is rated highly in the ratings and metrics table above. The stock has a great history of increasing dividends and an impressive 5-year dividend growth rate. What I don't like about BEN is its declining assets under management and subpar performance across its actively managed funds. So I'll take a pass for now and see if BEN can turn things around.

On 14 November, new information was released about Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) portfolio, which now includes new positions in JPM and PNC. So let's look at these two stocks:

JPM's price line is below the primary valuation line and at the stock's normal P/E ratio line. The stock appears to be trading below fair value. An investment in JPM in January 2009 would have returned 11.7% on an annualized basis (with dividends included).

Interestingly, PNC's chart resembles that of JPM. PNC's price line is below the primary valuation line and at the stock's normal P/E ratio line. So the stock also appears to be trading below fair value. An investment in PNC in January 2009 would have returned 13.0% on an annualized basis (with dividends included).

6. Health Care

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Johnson & Johnson (JNJ)

AAA

A++

1

99

44%

0.58

5.0

Wide

Pfizer (PFE)

AA

A++

1

85

45%

0.82

3.6

Wide

Merck (MRK)

AA

A++

1

98

45%

0.82

4.6

Wide

AbbVie (ABBV)

A-

A

3

63

48%

1.51

3.8

Narrow

CVS Health (CVS)

BBB

A++

1

90

29%

1.05

3.8

Narrow

UnitedHealth (UNH)

A+

A++

1

99

27%

0.84

4.4

Narrow

Cardinal Health (CAH)

BBB+

A

3

91

36%

0.90

2.8

Wide

Eli Lilly (LLY)

AA-

A++

1

99

41%

0.35

5.0

Wide

Amgen (AMGN)

A

A++

1

89

37%

1.29

5.0

Wide

Abbott Laboratories (ABT)

BBB

A++

1

80

40%

1.20

4.6

Narrow

I own six of the top 10 Health Care sector stocks and all but one stock in the top 50 holdings of dividend ETFs. The exception is MRK, a stock I wouldn't mind adding to my portfolio. Unfortunately, MRK is trading at a premium to fair value according to Morningstar. And the following chart from F.A.S.T. Graphs confirms this valuation:

An investment in MRK in January 2009 would have returned 12.1% on an annualized basis (with dividends included).

LLY looks like another stock with strong fundamentals, including a top DARS rating of 5.0 from Dividend.com. Alas, LLY also trades at a premium to Morningstar's fair value estimate. The stock would need to trade below $94 per share for me to a buyer.

7. Industrials

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

3M (MMM)

AA-

A++

1

88

54%

1.16

4.4

Wide

Boeing (BA)

A

A++

1

98

48%

1.27

4.4

Wide

Union Pacific (UNP)

A-

A++

1

89

40%

1.06

5.0

Wide

Lockheed Martin (LMT)

BBB+

A++

1

79

46%

0.97

4.6

Wide

General Electric (GE)

BBB+

B

3

10

63%

1.02

2.4

Narrow

United Technologies (UTX)

A-

A++

1

97

39%

1.14

4.4

Wide

Illinois Tool Works (ITW)

A+

A++

1

87

45%

1.28

4.6

Narrow

W.W. Grainger (GWW)

A+

A++

2

97

34%

1.08

4.4

Narrow

GATX (GATX)

BBB

n/a

n/a

12

35%

1.48

4.0

Narrow

MSC Industrial Direct (MSM)

n/a

n/a

n/a

84

44%

0.70

4.6

Narrow

I own all four of the Industrials sector stocks in the top 50, plus one additional stock not in the top 50 (ITW). Five of the top 10 Industrials sector stocks are trading below Morningstar's fair value estimate. Of the stocks I don't own, UTX looks the most interesting.

The price line of UTX is above the primary valuation line and above the stock's normal P/E ratio. Based on the historical price/earnings correlation, the stock appears to be trading above fair value. However, Morningstar's fair value estimate is 12% above UTX's current stock price.

8. Information Technology

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Apple (AAPL)

AA+

A++

2

95

23%

1.07

4.2

Narrow

Microsoft (MSFT)

AAA

A++

1

97

41%

1.28

4.8

Wide

Cisco Systems (CSCO)

AA-

A++

1

90

47%

1.10

5.0

Narrow

Intel (INTC)

A+

A++

1

85

13%

0.82

4.6

Wide

International Business Machines (IBM)

A

A++

1

65

43%

1.04

3.2

Narrow

Texas Instruments (TXN)

A+

A++

1

85

45%

1.38

4.2

Wide

Visa (V)

AA-

A++

1

97

19%

1.13

4.2

Wide

Qualcomm (QCOM)

A-

A+

2

65

69%

1.64

2.6

Narrow

Accenture (ACN)

A+

A++

1

93

41%

0.97

4.8

Wide

Mastercard (MA)

A+

A++

1

98

16%

1.19

4.0

Wide

I own all the Information Technology sector stocks in the top 50, and one additional stock not in the top 50 (QCOM). Six of the top 10 Information Technology sector stocks are trading below Morningstar's fair value estimate.

Because I already own fourteen stocks in the Information Technology sector, I'm not really interested in adding more stocks in this sector to my portfolio.

9. Materials

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Sonoco Products (SON)

BBB+

n/a

n/a

83

49%

0.93

5.0

None

Nucor (NUE)

A-

A

3

90

24%

1.44

2.6

None

DowDuPont (DWDP)

A-

A+

2

40

71%

1.67

4.4

Narrow

CF Industries (CF)

n/a

B+

3

40

127%

1.13

3.2

None

International Paper (IP)

BBB

B++

3

69

38%

1.38

3.0

None

Compass Minerals International (CMP)

BB-

n/a

n/a

35

133%

1.17

2.2

Wide

PPG Industries (PPG)

A-

A+

1

88

31%

1.24

4.4

Narrow

Ecolab (ECL)

A-

A

1

96

32%

0.84

4.2

Wide

Air Products and Chemicals (APD)

A

A++

1

96

55%

1.25

4.8

Narrow

Sherwin-Williams (SHW)

BBB

A+

2

86

19%

1.25

4.0

Narrow

None of the Materials sector stocks are in the top 50 holdings of dividend ETFs, and I don't own any top 10 Material sector stocks. Five these stocks are trading below Morningstar's fair value estimates.

I am looking to add a few Materials sector stocks to DivGro. Of the discounted candidates (according to Morningstar), the only stock that looks interesting is APD. The stock yields 2.79% and has a reasonable 5-year DGR of 8.2%. The dividend is deemed Very Safe by Simply Safe Dividends.

APD's price line is above the primary valuation line and above at the stock's normal P/E ratio line. So, from F.A.S.T. Graph's perspective, APD is trading above fair value. However, Morningstar's fair value estimate is about 19% above the stock's current price, so I think some additional analysis is called for to determine a good entry point. An investment in APD in January 2009 would have returned 14.2% on an annualized basis (with dividends included).

Let's also look at some of the other candidates with solid ratings and metrics. PPG, ECL, and SHW all have Very Safe dividends. PPG has the higher yield, but ECL and SHW are growing at double-digit growth rates.

PPG's price line is above the primary valuation line but at the stock's normal P/E ratio line. The stock is trading above fair value, confirming Morningstar's assessment. An investment in PPG in January 2009 would have returned 19.1% on an annualized basis (with dividends included).

The F.A.S.T. Graphs chart of ECL provides confirmation that the stock is trading at a premium to fair value. But it also shows an impressive growth rate! An investment in ECL in January 2009 would have returned 16.9% on an annualized basis (with dividends included).

Likewise, the chart of SHW confirms that the stock is trading at a premium valuation. SHW's growth rate is even more impressive! An investment in ECL in January 2009 would have returned 22.1% on an annualized basis (with dividends included).

10. Real Estate

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Realty Income (O)

A-

n/a

n/a

80

83%

0.17

4.0

None

Simon Property (SPG)

A

A

2

74

65%

0.34

4.2

Narrow

Federal Realty Investment (FRT)

A-

n/a

n/a

84

66%

0.28

4.2

None

HCP (HCP)

BBB+

B++

3

45

92%

0.09

2.8

None

Tanger Factory Outlet Centers (SKT)

BBB+

n/a

n/a

75

62%

0.37

1.8

Narrow

National Retail Properties (NNN)

BBB+

n/a

n/a

95

72%

0.21

4.2

None

Welltower (WELL)

BBB+

B+

3

69

94%

0.13

3.8

None

CoreCivic (CXW)

BB

n/a

n/a

43

81%

1.31

1.4

Narrow

Iron Mountain (IRM)

BB-

B+

3

52

80%

0.92

3.0

Narrow

Ventas (VTR)

BBB+

B+

3

65

83%

0.19

2.8

None

I own five of the top 10 Real Estate sector stocks, and all but two of these stocks are trading below Morningstar's fair value estimate.

With eleven Real Estate sector stocks in my DivGro portfolio, I'm not really interested in adding more stocks in this sector to my portfolio. And, frankly, none of the top 10 Real Estate sector stocks I don't own look attractive to me.

11. Utilities

Ticker

S&P

Credit

Rating

VL

Financial

Strength

VL

Safety

Rank

SSD

Dividend

Safety

SSD

Payout

Ratio

SSD

Beta

DCOM

DARS

Rating

M*

Moat

Duke Energy (DUK)

A-

A

2

80

75%

-0.02

4.0

Narrow

PPL (PPL)

A-

B++

2

76

67%

0.51

2.6

Narrow

FirstEnergy (FE)

BBB

B++

2

33

51%

0.26

4.2

Narrow

Dominion Energy (D)

BBB+

B++

2

75

81%

0.19

3.6

Wide

AES (AES)

BB+

B

3

54

39%

0.72

3.6

None

Exelon (EXC)

BBB

B++

3

67

44%

0.27

3.6

Narrow

Entergy (ETR)

BBB+

B++

3

87

48%

0.36

3.2

None

American Eagle Power (AEP)

A-

A+

1

84

61%

0.09

4.2

Narrow

Southern (SO)

A

A

2

63

71%

-0.01

3.6

Narrow

DTE Energy (DTE)

BBB+

B++

2

88

53%

0.13

4.2

Narrow

I own only one of the top 10 Utilities sector stocks, and four of these stocks trade below Morningstar's fair value.

Of the stocks I don't own, only AEP and DTE look interesting to me. They have good ratings and their dividends are deemed Safe by Simply Safe Dividends. However, both of these stocks trade at premium valuations.

Utilities conduct their business in highly regulated markets, which limits growth prospects but practically ensures consistent dividend growth. Moreover, Utilities sector stocks offer above-average dividend yields. This makes Utilities sector stocks popular choices for long-term dividend growth investors.

If I see strong evidence of consistency in the F.A.S.T. Graphs chart of a Utilities sector stock, I'm willing to pay a small premium to establish a position.

AEP's price line is above the primary valuation line and also above the stock's normal P/E ratio line. The stock is trading above fair value, which confirms Morningstar's valuation. An investment in AEP in January 2009 would have returned 11.2% on an annualized basis (with dividends included).

Likewise, DTE's price line is above the primary valuation line and also above the stock's normal P/E ratio line. So DTE also trades above fair value, confirming Morningstar's valuation. An investment in DTE in January 2009 would have returned 15.0% on an annualized basis (with dividends included).

Concluding Remarks

Analyzing the holdings of dividend ETFs helps me to identify quality dividend growth stocks I don't yet own. Looking at the top-ranked stocks by GICS sector provides additional insight, especially since I want to improve my portfolio's diversification.

In Part 2 of this article, I showcased the top 10 stocks in each GICS sector and I presented F.A.S.T. Graphs charts for candidates I consider worthy of further analysis and possible investment. In an upcoming article, I'll revisit these candidates and provide my own fair value estimates.

Thanks for reading! If you liked this article and would like to read similar articles in future, please click the Follow link at the top of this article. And, if you're already following me, I sure would appreciate it if you click on the Like button below!

Disclosure: I am/we are long AAPL, ABBV, AFL, AMGN, AMZN, BA, CB, CMCSA, CMI, CRM, CSCO, CVS, D, DGX, DIS, DLR, EPR, ES, EXR, F, FB, FRT, GD, GILD, GOOG, HD, HON, HRL, IBM, INTC, ITW, JNJ, KBH, KO, KRG, LMT, LOW, MAIN, MCD, MDT, MMM, MO, MSFT, NEE, NFLX, NIE, NKE, NNN, NVDA, O, OHI, PFE, PG, PSA, QCOM, ROST, RTN, SBUX, SKT, SPG, SWK, T, TJX, TROW, TRV, TSM, TXN, UNH, UNP, UPS, V, VLO, VYM, VZ, WBA, WEC, WMT, XOM. 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.