Summary

History can help us boost our returns by allocating more to sectors that have the highest total returns, and especially to stocks beat their sectors’ averages. For more background information, see this article.

Where to put your cash in Dividend Stocks (also called “Asset Allocation”)

Using our own research, we created the info contained in the article. Starting first with the universe of US stocks that have a history of paying increasing dividends for at least 5 years, we sorted them into sectors, and took the total returns of each of the stocks and averaged them to extract an average total return for each of the stocks’ sectors. It’s not super, highly technical, rocket-science-ish, regressive analysis, but good enough for a gross sense of where most of your growth could possibly come from. That’s if the past is any indicator of the future, so tread cautiously.

2019-06-Sector-Averages-All-CCC

In the chart above, “Average Metrics By Sector | No Criteria Applied,” are the averages for the universe of stocks that have paid increasing dividends for a minimum of five years. These are the current values as of June 30th, 2019. The Dividend System™ score (which is an indication of growth potential) ranges from a low of 5.0 to a high of 15.8.

Next we sort the records and display only the stocks with the Top 15 Dividend System™ potential growth scores. You can see that by doing so, the average score of the dataset has a low growth potential of 10.4 (in the Utilities sector) and a high of 38.9 (in the financial sector). This is an excellent example of how we can focus the quality of our investments by carefully choosing the criteria we search for.

2019-06-Sector-Averages-DivSys-Applied
Using the information contained in this month’s sector rankings, we can see that the sector that has produced the most growth in the past year is “Financial Services,” and the least is “Utilities.” Although we have a wide range in the averages of our Top 15, in nearly every category, the potential growth score is more that double. We know that these growth rates can’t be maintained over the long term due to the phenomenon of “Reversion to the Mean,” but we can enjoy the likely high returns until the winds of change force the potential for total return dow.

Below the data is sorted by sector, with the highest growth potential at the top (Financial Services) and the lowest growth potential at the bottom (Utilities).

Sector
Dividend System™ Growth Score
Past 5 Years Annualized Total Return
Debt to Equity Ratio
Lower is better
Beta
Lower is less volatile
Dividend Yield (%)
Price to Earnings Ratio
Increasing Dividends Since Year
Reliability of Returns
(Higher the better)
Financial Services
38.9
10.5
3.7
1.4
2.5
17
2010.5
1.5
Consumer Cyclical
37.6
10.8
-0.3
1.3
2.4
18.5
2004.5
3.3
Industrials
37.5
13.3
0
1.3
1.5
23.5
2003.7
3.3
Technology
30.8
15.8
1
1.2
1.9
24.5
2009.1
2.6
Basic Materials
30.3
10.2
0.8
1.1
1.9
23.3
2003.5
2.6
Healthcare
28.1
12.4
0.7
1
1.5
213.3
2005.5
3.5
Consumer Defensive
27.7
11.8
0.5
0.5
2.8
29.7
2000.3
2.9
Real Estate
20.9
12.3
-0.9
0.7
3.7
46.1
2010.5
1.9
Communi-cation
14.3
12.5
0.7
0.6
2.7
40.5
2000.7
3.7
Energy
14.3
-1.1
1.1
1
5.7
20.6
1996
1.0
Utilities
10.4
12.5
1.6
0.5
33
57.4
2001.9
1.8

Chart notes: Blue is “good,” Red is in an unacceptable range (remembering that these are averages and may not apply to all stocks in the sector), and Fuschia is likely an error in the data.

Conclusions

  • We do not recommend investing in the Energy sector due to its history of low performance, high volatility, and low total return
  • Utilities and Communications (Telecom) are worthwhile sectors to consider as they provide current income from highly regulated industries supplying power and internet/mobile phones that all of us depend on. Only AT&T (T) is the only stock up for consideration, but it remains to be seen if they will continue to be a dividend after their purchase of Time Warner
  • Consumer Defensive (Staples) sector is an excellent industry to stock up on (pun intended) so as to stabilize the portfolio for an uncertain domestic political climate and worldwide geopolitical concerns as we all need flour, mayonnaise, toothpaste and soap. Church & Dwight (CHD) and Estee Lauder (EL) have endeared themselves in the hearts of US consumers
  • Financial Services sector I view as generally risky unless you select a company with competitive advantages (a “wide moat”) that protects them from volatility. Insurance companies and well-run banks are the exception. Visa (V) has been a great growth machine with a much lower beta than Mastercard (MA)
  • Consumer Cyclical sector deserves caution as this sector is sensitive to economic slowdowns. Seek companies with established brand names such as Nike (NKE) or that would benefit from a downturn, such as T.J.Maxx (TJX) or Ross (ROST)
  • Healthcare sector is less susceptible to an economic downturn as health maintenance is usually not an option. Further study of United Health Group (UNH) may prove of interest as their dividend growth rate has been astronomical
  • Basic Materials and Industrials are sensitive to economic downturns, so proceed with caution choosing companies with well-known brands or a history of weathering economic storms, as can be seen by a low beta. Consider WD-40 Company (WDFC) and International Flavors and Fragrances (IFF)

I want to hear what you think!

Would love to hear your thoughts! As always, courtesy and respect are the Dividend System™ way!