Selecting stocks that have consistently paid increasing dividends, and choosing stocks from sectors with a history of outperforming the markets is the best way to reach your financial goals.

 By studying the performance of the the various sectors of the market, we can learn which sectors perform the best overall, in up markets, and in down markets. Most importantly, we can choose to avoid sectors that have a tradition of performing poorly, strategically targeting sectors that outperform the market repeatedly.

The folks at track the performance of S&P 500 over time, and have nifty, interactive graphics that display performance by sector for the last 12 years. Below is their chart of sector performance for 2007 – 2018.

Average Sector Returns for 2018
Covering the universe S&P 500 stocks. Source

As you can see, if your money had been focused in Energy or Financial indexes during this time period, your returns would have been dreadful, especially when compared to returns from the Health Care, Information Technology, and Consumer Cyclicals (Discretionary) sectors. Of course, these are averages for the sector.

In the book, Asset Allocation for Dummies, the authors suggest that the average consumer can avoid the following sectors:

  • Technology, described as too volatile
  • Utilities, described as having unimpressive long-term returns
  • Communications, same as utilities

While I agree with the sentiments in aggregate, I wouldn’t want to exclude communications or utilities for their high yield and income potential, which is very important to retirees (and others seeking current income). Excluding the Technology sector would eliminate some amazing companies that are finally becoming reliable dividend citizens, such as Microsoft (MSFT) and Apple (AAPL). Which brings us the our main point:

Individual dividend stocks can outperform their sector

This is the key fact that index investors overlook. There are some companies, few though they may be, that can outperform their index repeatedly. These companies typically have low beta, low debt-to-equity ratios, have paid an increasing dividend every year for at least five years (ideally 10 or more years), and have high free cash flow growth rates over time.

The Dividend System focuses on finding these stocks, studying their performance over time, and providing investors critical information that they may use in further research to build their own dividend investment portfolio.


The data is subject to a “Survivorship Bias.” The stocks that failed have been kicked out of the acceptable list of investments, and thus the data is skewed to support the survivors. This is a known problem in trying to use past performance in an attempt to estimate future results — the future is unknown. But the past is the best guide we have to anticipate the future. Of course, we can learn why some stocks survived, versus those that didn’t, and invest our funds in those stocks who exhibit “survival characteristics.”

Also consider the immutable law of “Reversion to the Mean,” which says that values that are far away from the average, will eventually return to the average, given enough time. Simply put, our goal in regard to this law, is to find stocks far from their industry average returns, and enjoy the increased returns before such time that market forces them back to the average.

Proof is in the numbers

In selecting investments, the Dividend System™ uses a set of select criteria to find investments that are likely to outperform over time, deliver current income (in the form of dividends to thank you for investing), and to offer reduced volatility compared to the market as a whole.

Is it really possible to beat the market? Yes and No! Over time, reversion to the mean says we won’t. In the meantime, let’s choose stocks from our select universe to increase our chances at success, and get paid along the way with dividends!

The spreadsheet below shows the sector returns and the stocks within the sectors who have beaten their sector’s average return, including a few famous stocks that didn’t!

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