Building A Do-It-Yourself Dividend Portfolio - Part 8: Materials

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 next week, 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 8: Materials

The Materials sector isn't exactly a breeding ground for good, stable dividend stocks. In fact, it is the only sector that is currently not represented in our portfolio (you'll see why as you read more). The sector has the second highest beta (1.29) and the second lowest 5-year total return (-7.2%) among all of the S&P 500 sectors. You can see the high beta in full effect in the graph below.

Generally speaking, stocks in the Materials sector do not currently rate very well in our system. In fact, we can only highlight 3 stocks in the sector that have a Parsimony rating over 90. Note that our composite rating ranges from 0 (lowest) to 99 (highest).

In general, we tend to shy away from stocks with a beta over 1.0 unless they have a very high rating in some of our key sub-categories. That said, as you dig a little deeper into the stocks listed above, you'll see that none of them really standout in any particular category (see sub-ratings below). Conversely, none of them are extremely weak in any category either.

This is the exact reason why we think our sub-rating system is so valuable for DIY investors. The sub-ratings add another layer of data to help you screen for the best dividend opportunities. Airgas (ARG) and PPG Industries (NYSE:PPG) have very high ratings in Relative Strength. However, it should be noted that Relative Strength has the lowest weighting of any sub-category in the overall Parsimony rating. Airgas also has a decent mark in Dividend Potential, while PPG and Praxair (NYSE:PX) have relatively high ratings for Dividend History.

The analysis above really shows how weak the sector is in general. There are 53 Materials stocks in our universe and only 3 have a Parsimony rating over 90! In fact, the top 3 holdings in the Materials Select Sector SPDR (NYSEARCA:XLB) all have Parsimony rating under 71:

  • E. I. du Pont de Nemours (DD): 60
  • Monsanto (NYSE:MON): 71
  • Freeport-McMoRan (NYSE:FCX): 36


The Materials sector is clearly one of the weakest sectors in the S&P 500 and it definitely showed in our rating system. That said, 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.

From an asset allocation standpoint, we believe that your DIY Dividend Portfolio does not need to have exposure to every sector all the time. When a sector is relatively weak and it is difficult to find good opportunities within the sector, it is ok to take a pass. We think that that is a very important point to note here.

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 Energy sector in Part 9 of this series, so please make sure to "follow" us.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.