Building A Do-It-Yourself Dividend Portfolio - Part 5: Financials

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 5: Financials

What a disgusting looking chart! Yes, you are looking at the axis right. The Financial sector was down over 80% during the 2008 recession. The sector has been by far the weakest sector in the S&P 500 over the past 5 years, with the worst current 5-year total return (-58.3%) and the highest drawdown (-82.7%). In addition, the sector has the highest average beta (1.49) of any sector.

Even though Financial stocks make up almost 30% of our dividend stock universe, its no surprise that there are only a few high-rated stocks in the sector.

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

Thankfully, the Financial sector is a mixed bag of industries (not just banks), some of which have done quite well over the past 5 years and currently offer investors very attractive yields. Our top-rated stocks in the sector include two insurance companies [Arthur J Gallagher & Co (NYSE:AJG) and Chubb Corporation (NYSE:CB)], two real estate investment trusts [Public Storage (NYSE:PSA) and Capstead Mortgage (NYSE:CMO)], and one asset manager [T. Rowe Price (NASDAQ:TROW)].

With the exception of Capstead, these companies have very long and stable dividend track records. As a matter of fact, Chubb and T. Rowe Price are both members of the S&P 500 Dividend Aristocrats club, which have followed a policy of increasing dividends every year for at least 25 years.

That said, Capstead makes the top-rated list primarily due to its stellar Risk-Reward rating (99). Dividend investors' opinions about mortgage REITs tend to be very black and white. They either love the stocks or they find them way too risky to touch. We actually find the mortgage REIT space very attractive and we have written extensively about the industry here on Seeking Alpha. Contrary to popular belief, mortgage REITs offer investors some of the best risk-adjusted returns of any dividend stock out there. Of the 8 stocks in our universe that carry the coveted "99" Risk-Reward sub-rating, half of them are mortgage REITs. In addition to Capstead, industry leaders American Capital Agency (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY) also carry a Risk-Reward Rating of 99.

Bottom line is that mortgage REIT investors are actually getting paid for the risk that they are taking, which is a compelling reason for dividend investors to keep an open mind about potentially adding a few to their DIY Dividend Portfolio.


Even though it may be hard to fathom, there are clearly some attractive opportunities in the Financial sector for your DIY Dividend Portfolio. The key takeaway here is that many of the broader sectors have sub-industries that perform much better than the sector as a whole. 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 Financial stocks in an upcoming article. Also, we will highlight our top-rated stocks in the Technology sector in Part 6 of this series, so please make sure to "follow" us.

Disclosure: I am long CB, CMO, NLY, AGNC.