Our monthly basket of stocks is composed of U.S. companies that have paid continuously increasing dividends for a minimum of seven years. For the month of July, 2021, there are 532 stocks in this basket. Naturally there are good and bad apples–we need to eliminate the rotten and wormy apples from the pristine “golden delicious” Apples you want in your portfolio!
We use averages to determine what dividend stocks are worthy of further consideration. Finding averages for any particular subset of the wide market is difficult. So we created our own averages based on the dividend stocks in each sector. Our thesis is simple: buy a stock that consistently performs above the average. This means, buy stocks that demonstrate the ability to deliver a total return above 10-11% per year!
“Not possible,” you say! But many stocks have been doing just that for quite a while. “What about ‘regression to the mean?’ Yes, all stocks will eventually return to the average. But in the meantime, reap the rewards of above average performance.
Our Dividend Sector Averages
Listed below are the sectors and the various averages of the dividend stocks therein.
What Can We Learn from the Chart
We look at the longer trends to determine where to put our investment dollars. As you can see from the 10-year annualized total returns, Consumer Cyclical stocks continue to deliver the highest total returns, at 17.3%. Technology stocks fall into second place at 15.9%.
Sadly, the energy sector is hyped as a ‘moneymaker,’ but the numbers tell a different tale: Energy’s 10-year annualized total return is a mere 6.7%, last place. Communication (telephone, cellular, and internet service providers), come in second from the bottom delivering a slightly more respectable 10-year annualized total return of 8.2%. Both of these are below market total returns. Historically you would need an average annual return of 10-11% per year to beat the market.
It’s better to put your investment dollars into sectors with a history of delivering more higher returns. Yes, over time one sector may fall out of favor while another returns to favor (check out the 5-year total returns to see the change).
How To Use This Information
When screening for dividend growth stocks, look for those that exceed their sector averages in as many categories as possible. No you want be able to achieve it for every category, so strive for above average Free Cash Flow growth and below average Debt-to-Equity ratios.
A well-balanced portfolio would include stocks from the nine sectors that have demonstrated the ability to beat the market over time. Right now that’s every sector except Energy and Communication. As we have written previously, to reduce risk a portfolio needs a minimum of twenty (20) stocks. Avoid having more than 10% of your money invested in any one sector.
What are your thoughts about “the averages?”
Let us know in the comments below!