When I worked in the trust business, I reviewed stock portfolios to see which stocks should be sold. Usually most were sold. It wasn't uncommon to see an incoming stock portfolio with more than a third of its portfolio in energy-paying dividend stocks.
These investors had chased high-yielding energy and commodity plays, oil and natural gas producers along with utilities and MLPs. The stocks produced decent income but sometimes chasing those yields could end with terrible results. I remember one investor liked Cliff's Natural Resources (NYSE:CLF) for its high yield. I saw CLF was paying out more in dividends than it was making in earnings. Can't have that. Sell it. CLF fell from $40 per share to $8 with cuts in its dividend. Energy stocks got hammered this year as oil has fallen to record lows.
I would encourage investors to be careful with overweighting any sector. I think investors who are overweight U.S. large caps and mid caps will be rewarded in 2015 due to growing economy and accelerating job growth. Money will continue to flow from overseas to the U.S stock and bond markets. I am overweight consumer non-cyclical stocks like Church & Dwight (NYSE:CHD), Hershey (NYSE:HSY) and PepsiCo. (NYSE:PEP). These stocks pay steady dividends and tend to perform fairly well when inflation is modest.
I am also overweight railroad stocks, which have outperformed the S&P500 this year. Investors buying railroad stocks are buying them at the top of the valuations today. You have to pay a premium for good dividend-paying rail stocks like Union Pacific (NYSE:UNP) or Canadian National Railway (NYSE:CNI) but in the long run, I would rather have my money with these winners.
Active money managers always have a tough time beating the S&P 500, the benchmark by which equity managers are measured. Why not just own the benchmark? I own quite a bit of Vanguard Index 500 (MUTF:VFINX).
Disclosure: The author is long CHD, PEP, HSY, VFINX, UNP, CNI.