Building A Do-It-Yourself Dividend Portfolio - Part 9: Energy

Includes: CVX, EPD, KMP, MMP, OKE, PAA
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

This is the last part of our 9-part series in which we have highlighted 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 9: Energy

At the end of the day, the Energy sector hasn't performed much better than the S&P 500 over the past 5 years. However, the sector has the second highest annualized standard deviation (46.0%) of any sector in the broader index over the past 5 years and it has had some pretty wild swings (see chart below). The abnormal price swings are primarily due to the fact that the sector has more relative exposure to fluctuations in commodity prices than most sectors do. That said, the sector offers some very compelling investment opportunities for DIY Dividend investors.

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

These 6 top-rated stocks have an average dividend yield of 5.0% and average beta of 0.50. In general, companies with low betas will tend to be less volatile than the general market and will help dampen portfolio volatility. In addition, these stocks have an average 5-year total return over 95%, led by ONEOK Partners (OKS) and Enterprise Products Partners (NYSE:EPD). Kinder Morgan Partners (NYSE:KMP) and Plains All American (NYSE:PAA) have the highest current dividend yields of the group, while Magellan Midstream Partners (NYSE:MMP) has the lowest beta.

You'll notice that 5 of the 6 top-rated stocks in the sector are Master Limited Partnerships ("MLPs"), which we believe have extremely attractive risk-reward profiles for income investors. As shown in the table below, these 5 MLPs have some of the highest risk-reward profile ratings among our entire dividend stock universe thanks in part to their high risk-adjusted returns over the past 5 years.

Chevron Corp. (NYSE:CVX), the only non-MLP stock that made our list, has a very high sub-rating for Financial Stability (98) and a respectable rating for Dividend History (85).


Any DIY Dividend Portfolio should include several stocks from the Energy sector. The key takeaway here is that many of the broader sectors have sub-industries (like MLPs) 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 Energy stocks in an upcoming article, so please make sure to "follow" us.

Disclosure: I am long KMP, PAA, OKS, EPD.