A very important part of building a dividend portfolio (as is the case with any other investment portfolio) is asset allocation. Some investors will invest on different sectors to have a well-balanced portfolio. Others will invest massively in a sector according to the state of the economy. Using consumer, non-cyclical stocks as a defensive measure in a bear market is a good example of this kind of strategy.
For information purposes, I have outlined the projected dividend yields for the current quarter (Q3 2010) of each sector of the US market according to financial analysts:
| Sector | Projected Dividend Yields |
|---|---|
| Basic Materials | 2.21% |
| Communications | 3.78% |
| Consumer, Cyclical | 2.26% |
| Consumer, Non-Cyclical | 2.54% |
| Energy | 1.49% |
| Financial | 3.78% |
| Industrial | 2.38% |
| Technology | 2.28% |
| Utilities | 4.51% |
| Average | 2.80% |
While these numbers are only projections, it is really interesting is to see the trends of each sector (Energy is definitely not a place to invest while hunting for dividend yield!).
But what is very interesting when looking to invest by sector, is to see which sector includes the best dividend paying companies and which sectors have the best dividend increases.
When companies touch their dividend (cut or raise), this is a good indicator of their financial health and the company’s perspective for the future. We recently saw that BP waited the last until the last minute to suspend their dividend in order to deal with the oil spill. They could have suspended it much earlier but it would have sent a panic message to investors (they are already concerned enough in my opinion!).
So I took a closer look at the major dividend trends by sector
. Here’s what I found:
Dividend increases among all sectors
During Q2 2010, all sectors show at least 10% of their companies raising their dividends. It is important to know the dividend trend for all sectors before looking at one since you want to find where the future dividend increases will be found. For example, almost 14% of the communications companies raised their dividend in Q2 2010. This shows that they are following the trend of the economy but not much more than that (compared to industrials with 50% of the companies raising their dividends).
Financial sector on the right track to keep their dividend
It was with no surprises that almost 20% of the financials cut their dividend during Q2 2009. However, I found it interesting that 87% maintained and 10% increased their dividend yield during Q2 2010. This shows that the financials are slowly climbing out of the credit turmoil and some opportunities can be found in this sector. The average projected yield is good but you can forget about commercial banking for a while. The economic instability combined with confusing regulation around Basel III capital and liquidity ratios won’t permit those companies to “share the wealth” for a while.
On the other hand, the buying opportunities may be found in the Savings & Loans banks. They recently reported their highest profits since 2007 and they have been treating their investors with higher dividend payouts. Eastern S&L’s seems to be in the best position as The West Coast is still stuck with several economic problems.
Consumer Non-Cyclical sector; always a good dividend payer
In Q2 2009, only 5% of the companies cut their dividend while 13% raised it. In 2010, it’s even better; not 1% cut their dividend and 15% raised it. This shows you, without a doubt, that the consumer non-cyclical sector remains a good dividend payer whether the economy is in a recession or during times of growth. While the average dividend yield seems smaller than other sectors, sometimes, it is interesting to have steady dividend income than hunting down the highest dividend yield!
Speaking of high dividend yield; Utilities are showing great numbers
Utilities are not only paying high dividend yields, they are maintaining their rhythm over time. Among utilities, electric companies seem to manage their dividend strategy altogether as most of them respect a dividend payout ratio of 40-60% (which is definitely a great news for dividend investors!). This means that if a couple companies raise their dividend, the others will likely follow to be kept in the loop. You can find companies giving high dividend yields such as 4 to 5% which is quite considerable.
Dividend Investing per Sector
Considering your asset allocation is very important in your dividend investment strategy as it will help you achieve your objectives. If you are looking for stability, I think it is clear that you should not maintain a high concentration in US financials (You might want to look into Canadians Banks to compensate though).
A good way to invest per sector is to use stock filters and target specific sectors. You will be able to draw stock charts of specific sectors and pick what you are looking for (low dividend payout ratio, dividend growth, high dividend yield, potential for stock growth, etc.).
In the end, concentrating on specific sectors is always riskier but if you can read the economy right, you can definitely build a strong portfolio using sector investing.
You can also diversify by country. Thus avoiding risks that only affect the USA, although this is increasingly difficult with globalization.
@Dividend,
What I like about the US market is that you can find companies such as P&G or JNJ that make money in several countries so you can get a part of geo diversification through this.
If you want to diversify in financial sector, I would pick Canada without hesitation.
I recently discovered your site and am a follower of sectorial/dividend investing as a relatively secure means to combine risk/reward with cash income/capital appreciation. Your ideas are very stimulating. Thanks. Donald
ok but what about etfs example xlk or xlv also for diversification how about blackrock etfs bgy