Building A 6% Income Portfolio For 2013 (Part

1): Investment Plan & Strategy

December 13, 2012  | 40 comments
Disclosure: I am long AGNC, KMP, MCD, WMT. (More...)

Whether you are new to dividend investing or you are a seasoned pro,it's likely that your main goal is to
build a long-term portfolio that generates consistent income over time with as little volatility as possible.
That said, over the next few weeks we will be publishing a 10-part series which should help you build your
own DIY Dividend Portfolio for 2013.
In part 1 (below), we highlight the investment plan and strategy for the portfolio and parts 2-10 will
highlight each sector in the S&P 500, including high-rated stocks with in each sector that you should
consider for your portfolio. Below is a schedule of the entire series. Please make sure to  "follow" us so
that you will be notified when each new article is published.
 Part 1: Introduction / Investment Plan & Strategy
 Part 2: Consumer Staples
 Part 3: Utilities
 Part 4: Healthcare
 Part 5: Consumer Discretionary
 Part 6: Financials
 Part 7: Technology
 Part 8: Industrials
 Part 9: Materials
 Part 10: Energy
BUILDING A DIY DIVIDEND PORTFOLIO

The investment plan for our DIY Dividend Portfolio is very simple:
1. Identify, research, and invest in dividend stocks with the best risk/reward profiles.
2. Identify low-risk entry points for each stock.
3. Diversify using strict asset allocation targets and concentration limits (for asset classes, industries,
and individual stocks).
4. Utilize conservative option strategies and portfolio hedging techniques and to generate additional
income and to manage downside risk.
5. Maintain a disciplined exit strategy for each stock by closely monitoring changes in fundamental
and technical data points.

Based on this simple investment plan, we believe that investors can build and monitor their own DIY
Dividend Portfolio that should generate annual income of at least 6% (through a combination of dividend
income and option income). While we could dedicate an entire article to each of these key steps, below is
a high level summary to get you started.

1. IDENTIFY THE BEST DIVIDEND STOCKS

The bulk of your 6% target yield will be derived through dividend income, so it's very important to identify
dividend stocks with the best risk reward profile.

We use a combination of fundamental and technical analysis to determine which stocks to buy and when
to buy them. For dividend stocks in particular, we have a proprietary rating system that ranks over 700
U.S. dividend stocks on a weekly basis.
 Our composite rating is derived by ranking each stock based on 28 key fundamental and technical data
points in five sub-rating categories:
1. Risk-Reward Profile (e.g., current yield, Calmar ratio)
2. Financial Stability (e.g., sales and EPS growth, ROE, leverage)
3. Dividend History (e.g., historical dividend stability and growth)
4. Future Dividend Potential (e.g., payout ratio, EPS estimates)
5. Relative Strength (e.g., 12-month total return and trends)
Most online brokers offer their clients stock screening software for free. Investors can utilize this software
to determine which stocks are the most desirable for their portfolio (using some our key data points as a
guide). Note: Our overall rating and each sub-category rating range from 1 (lowest) to 99 (highest). When
choosing investments for our own DIY Dividend Portfolio, we tend to target stocks with an overall rating of
at least 80.

Below is an example of five widely held dividend stocks that rank very highly in our system.

When analyzing the sub-ratings for each stock, you can see that most top-rated stocks generally have very
strong scores (90+) in several of the sub-rating categories as well. As shown in the table below, all of the
companies on the list above have long and stable dividend histories (as dictated by their high Dividend
History rating).

As a matter of fact, Wal-Mart (WMT), Abbott Laboratories (ABT), and McDonald's (MCD) are all members of
the S&P 500 Dividend Aristocrats club, which have followed a policy of increasing dividends every year for
at least 25 years. Even though they aren't members of this prestigious group (due to a shorter dividend
track record), we still consider stocks like Kinder Morgan Partners (KMP) to be very safe long-term
investments.

We created our ranking system to help us find the best dividend stocks. If you rank all of the stocks in a
universe against their peers on a consistent basis, it becomes clear which companies are the strongest and
which offer the best investment opportunities going forward.

2. IDENTIFY A "BUY ZONE" FOR EACH STOCK

We believe that patience is a virtue. Just because a stock has a high rating in our system, it doesn't
necessarily mean that you should run out and purchase it that day. We scan the charts of our top-rated
 stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a
target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given
stock will drastically improve your long-term investment results.

In other words, we use fundamentals to decide WHICH stocks to buy and we use a combination of
technicals and valuation to determine WHEN to buy those stocks.

As we highlighted above, once we have decided that we want to purchase a particular stock, we look for a
low-risk entry point to open the position. We call these entry points our "Buy Zones" and they are points at
which long-term dividend investors should feel comfortable starting to build a position in the respective
stocks. We focus on four key levels of support when determining a "Buy Zone":
 Technical - Support from short and long-term trend lines (i.e, 10-week and 40-week moving
average).
 Volatility - Target correction levels based on historical volatility and maximum draw down.
 Valuation - Support levels based on historical valuation multiple.
 Yield - Support levels based on forward dividend yield.

We then average the low end and the high end of these key support levels to determine our target "Buy
Zone".

It should be noted that this is how we determine our "Buy Zones", but there are no right or wrong answers
here. We encourage investors to think hard about the key levels of support for their own stocks. What is
the valuation level that you would feel comfortable buying a certain stock? What yield level makes sense
for you? Also, you may want to add different parameters that fit your investment style better. The key
takeaway here is that you establish a consistent process for determining a "Buy Zone". Below are links to
some our recent articles with specific examples to give you a better idea about how we determine our
"Buy Zones".
 Buy Zones: 5 Low Beta Dividend Stocks For Retirees to Consider
 DIY Dividend Portfolio: McDonalds Is In The "Buy Zone"

If you are a new dividend investor and are building your DIY Dividend Portfolio from scratch, don't feel
pressured to have a fully diversified portfolio on day one. Dividend investing is a marathon, not a sprint.
It's extremely important to be patient when building a long-term portfolio...we can't stress that enough.

3. DIVERSIFY USING STRICT CONCENTRATION LIMITS

Dividend growth investing has proven to have a significant amount of "edge" over the long-term. However,
in order for investors to realize that "edge", they need to stay in the game long enough to win. By
diversifying your portfolio, you reduce the risk that one stock or industry derails your entire long-term
investment plan.

That said, below are our simple Asset Allocation/Position Sizing rules for the DIY Dividend Portfolio:
 Maximum Stock Position (3-5% of total portfolio) - We believe that a diversified DIY
Dividend Portfolio should include at least 20-30 high-quality dividend stocks, with no stock accounting
for more than 5% of the total portfolio.
 Maximum Industry Position (15-20% of total portfolio) - Ideally, a DIY Dividend Portfolio
should include stocks from a variety of industries. However, under no circumstances should one specific
industry or sector account for over 20% of the total portfolio.
 Maximum "High Yield" Exposure (20-30% of total portfolio) -Generally speaking, high-yield
stocks (i.e., stocks with yields greater than 6.0%) are either speculative in nature or they have different
tax circumstances (e.g., master limited partnerships ("MLPs") and real estate investment trusts
("REITs")). Some of these stocks may have company-specific issues that warrant a higher yield or they
may operate in a high-risk, volatile industry. While high-yield, speculative stocks are not appropriate for
every investor; many of these stocks have strong risk/reward profiles (particularly MLPs and REITs) and
 can offer good risk-adjusted returns for a diligent investor. That said, we recommend that investors limit
their total exposure to "high yield" stocks.
 Maximum Portfolio Beta (less than 0.75) - We believe that low beta dividend stocks offer
investors the best long-term risk-adjusted yields. As such, we target a weighted-average beta of less
than 0.75 for our DIY Dividend Portfolio. Generally speaking, low beta stocks tend to dampen overall
portfolio volatility.
4. UTILIZE CONSERVATIVE OPTION STRATEGIES

While the bulk of our 6% target yield will come from dividend income, we believe that investors can
generate an additional 2%-3% per year in option income by implementing the conservative strategies
discussed below.

Covered Calls

Although the covered call strategy can be utilized in any market condition, it is most often employed when
the investor desires to either generate additional income (over dividends) from shares of the underlying
stock, and/or provide a limited amount of protection against a decline in underlying stock value. Investors
should consider the following three components when choosing a strike price for their covered call
strategy:
 Premium Yield (%) - The additional yield generated by the call premium (which is your downside
protection from the current price). The more volatile the stock, the higher the premium (i.e., the higher
the risk).
 Margin of Safety (%) - The margin of safety is the amount that the stock would have to drop
from the current level (before expiration) to completely offset the call premium and the dividend yield.
Note: If the underlying stock does not pay a dividend, the Margin of Safety will be equal to the Premium
Yield.
 Upside Profit (%) - The upside profit, which assumes that the option is assigned at expiration, is
equal to the premium received + dividends received + the difference between strike price and current
price. The more volatile the stock, the higher the expected upside profit.
The table below highlights various covered call options for Microsoft Corp (MSFT).

Depending on which covered call option you choose, you could enhance your income yield on MSFT by 70-
290bps over the next 2-3 months. Clearly, covered calls are a tradeoff between premium yield and upside
profit. The higher the premium yield, the lower the upside profit (i.e., the higher the probability that the
buyer of the option will exercise his right to purchase your stock).

As a long-term dividend investor, you would obviously like to avoid losing your stock. However, we feel
that this is a prudent risk to take in the current market environment. Stable risk-adjusted income yield will
continue to be difficult to come by in the years to come and investors should definitely consider
implementing a covered call strategy in their portfolio.
 Cash-Secured Puts

We often use a cash secured put strategy to generate income while we patiently wait for the "buy zones"
on high-rated stocks that we are stalking. Remember, if you sell a put, you have an obligation to purchase
the stock at a predetermined price (strike price) on or before the expiration date (if the buyer of the put
option wants to sell you the stock). Clearly, the risk is that the stock drops significantly below the strike
and you are forced to buy the stock at a price above market. That said, below are our two risk
management rules of put selling:
 Only sell put options on stocks that you want to own at the price you want to own
them. With a put selling income strategy (focused on out-of-the-money puts), you get paid to wait for
the price you want on a stock. If the price never drops to your strike, you get to keep the premium
(income) as a consolation prize. Your downside is owning the stock at the strike price (keep that in mind
as you analyze the ideas below).
 Don't sell "naked." Just because options offer you leverage, it doesn't mean that you have to
use the leverage. We recommend securing your short put position with cash (i.e., don't sell on margin).
If you aren't willing to risk the cash to back it up...don't sell the put.
The table below highlights stocks which have a current yield over 2.5% and are stocks that we would love
to add to our portfolio. When choosing a strike price for a cash-secured put strategy, we try to make sure
our break-even price on the option trade is in or below our target "Buy Zone". On average, the stocks
below have a 2-4 month premium (income) yield of 1.6% with a margin of safety of 8.5%.Note:
We prefer utilizing options with expiration dates that are at least 2-4 months out to reduce trading costs.

Clearly, cash-secured puts are a tradeoff between premium yield and margin of safety. Stocks with higher
implied volatility, like American Capital Agency (AGNC), have higher premium yields to compensate the
investor for the higher volatility. These stocks will also typically have a higher margin of safety.
5. MAINTAIN A DISCIPLINED EXIT STRATEGY

Even though most investors focus more energy on their entry strategy, your exit strategy is really the
driver of long-term investment success. Exiting a bad position or raising cash (i.e., selling winners) at the
appropriate time are risk management strategies that you can't afford to ignore.

As discussed above, it's important to diversify your portfolio among various stocks and sectors, paying
close attention to any concentration limits that have been set. These concentration limits are the first line
of defense when you are monitoring your portfolio on an ongoing basis. For example, if a stock reaches
your concentration limit for an individual stock, you will want to take some chips off the table to get back
within your limit. Also, if your sector concentration limits are beached, you should lighten up your positions
in that particular sector.
Establish Maximum Loss Thresholds
We all make bad investment decisions from time-to-time, it's part of the game. Knowing that, you should
never let a few losses destroy your entire portfolio. Establishing a maximum loss threshold for individual
stock positions is a great way to mitigate this risk. Depending on the size of your portfolio, we believe that
the 0.50%-1.00% of total portfolio value is a good maximum loss threshold range to target.

For example, if you have a $100,000 dividend portfolio with a 0.50% maximum loss threshold, you should
limit your loss on any one position to $500 ($100,000 x 0.50%). So if you bought 50 shares of McDonald's
at $88.00, you should limit your loss to $10 per share ($500 / 50 shares). This rule should also keep you
disciplined with your position sizing!

Have the Disciple to Take A Loss When You Need Too

We can't stress this enough. Most investors have a severe case of loss aversion (i.e., they emotionally
can't handle taking a loss), so they end up riding a loser lower and lower with the hope that the stock will
one day turn in their favor. If you are following the right metrics, your dividend stocks will show warning
signs months in advance of a real problem. The key is to stay disciplined and to get out of a stock when
red flags appear...no questions asked (even if it means taking a loss). Trust us, it's a whole lot easier to
replace income yield than it is to replace capital (especially in retirement).

Play With The House's Money When You Can

It's important to take profits when you can, especially if you feel that the market is due for a pullback. One
strategy that we like to use when taking profits on a big winner is to sell part of our position to get all or
most of our initial investment out. This strategy will help you free up some cash while allowing your
"winner" to run further.

CONCLUSION

Building a DIY Dividend Portfolio can and should be simple. The key to success is to establish a consistent
investment plan and to follow that plan religiously. As we pointed out in this article, picking the right
stocks is only a piece of the puzzle. A dedicated investor should also establish entry and exit strategies for
those stocks. In addition, you should remove "buy and hold" from your vocabulary. A long-term dividend
portfolio needs to be monitored over time to ensure that your downside risks are being managed
appropriately.

Building A 6% Income Portfolio For 2013 (Part

2): Consumer Staples
December 18, 2012  | 7 comments  |  includes: CL, GIS, HRL, KMB, WMT
Disclosure: I am long WMT. (More...)

Whether you are new to dividend investing or you are a seasoned pro, it's likely that your main goal is to
build a long-term portfolio that generates consistent income over time with as little volatility as possible.
That said, over the next few weeks we will continue publishing our 10-part series which should help you
build your own 6% DIY Dividend Portfolio for 2013.

In part 1, we highlighted the investment plan and strategy for the portfolio and parts 2-10 will highlight
each sector in the S&P 500, including high-rated stocks with in each sector that you should consider for
your portfolio. Below is a schedule of the entire series. Please make sure to "follow"  us so that you will be
notified when each new article is published.
CONSUMER STAPLES

Like most "defensive" sectors, the Consumer Staples sector has significantly outperformed the S&P 500
over the past 5 years, with a total return of 43.2% (vs. a 10.3% total returm fot the S&P 500).
More importantly, the sector was also much less volatile than the broader market. We often look at
maximum drawdown (peak-to-trough decline) to help us quantify the downside risk of an investment.
While the S&P 500 declined over 55% during the 2008 recession, the maximum drawdown for the
Consumer Staples sector was a much more modest 32% (see chart above).

Higher total returns with less downside risk...what's not to like about the sector.

That said, below is a list of some of our top-rated Consumer Staples dividend stocks. Note that our
composite rating ranges from 0 (lowest)to 99 (highest).

All of the stocks on the list above have a current dividend yield of at least 2.2% and a 5-year beta under
0.50. Also, all of these stocks have significantly outperformed the S&P 500 over the past 5 years (on a total
return basis). The tables below highlight some of the key data points that we analyze when ranking our
dividend stocks.
Wal-Mart Stores (WMT) currently has our coveted "99" overall Parsimony ranking, which is the highest
ranking in our system. Wal-Mart is one of the best dividend growth stocks of all-time and it is a member of
the S&P 500 Dividend Aristocrats club (which have all followed a policy of increasing dividends every year
for at least 25 years). Wal-Mart has delivered shareholders a 62% total return over the past five years, and
it has increased its dividend at a compound annual rate of 13.5% over that period. In addition, the
company still has a very modest payout ratio of 31.9%, so it has plenty of room to continue to increase its
dividend in the future.
Hormel Foods (HRL) carries our highest rating for Dividend Track Record (99) and it is also a fellow
member of the S&P 500 Dividend Aristocrats. Hormel recently announced its 47th consecutive annual
dividend increase, raising its annual dividend to $0.68 from $0.60 (a 13.3% increase). Over the past 5
years, the company has delivered shareholders a 75% total return, and it has increased its dividend at a
compound annual rate of 14.4% over that period. Like Wal-Mart, the company also as a very modest
payout ratio of 30.3%, so it has plenty of room to continue to increase its dividend in the future.
General Mills (GIS) has the highest Risk/Reward Profile ranking (92) of the five stocks highlighted above.
GIS has delivered shareholders a 65% total return over the past five years, and it has increased its
dividend at a compound annual rate of 11.0% over that period. In addition, the stock has the lowest beta
(0.17) of the group, with a very nice dividend yield north of 3.0%.

Kimberly-Clark (KMB) is also a member of the of the S&P 500 Dividend Aristocrats (are you seeing a
trend here???). KMB has the highest dividend yield (3.5%) of the five stocks mentioned and a very
respectable 5- and 10-year dividend growth rate of 7.0% and 9.5%, respectively. The stock has also been
on fire the past 12 months, with a total return of 24.5%.

To say that Colgate-Palmolive (CL) is a stable long-term dividend payor is an understatement. According

to the company's website, CL has "paid uninterrupted dividends on its common stock since 1895".
Needless to say, the company is also a member of the of the S&P 500 Dividend Aristocrats club. Over the
past 5 years, the company has delivered shareholders a 52% total return, and it has increased its dividend
at a compound annual rate of 12.0% over that period.
Conclusion

Any DIY Dividend Portfolio should include several stocks from the Consumer Staples sector. Stocks in this
sector tend to be stable dividend payors with low relative betas, which will help dampen overall portfolio
volatility.

Building A 6% Income Portfolio For 2013 (Part

2b): Consumer Staples 'Buy Zones'
December 26, 2012  | 12 comments  |  includes: CL, GIS, HRL, KMB, WMT
Disclosure: I am long WMT. (More...)

Whether you are new to dividend investing or you are a seasoned pro, it's likely that your main goal is to
build a long-term portfolio that generates consistent income over time with as little volatility as possible.
That said, over the next few weeks we will continue publishing our 10-part series which should help you
build your own 6% DIY Dividend Portfolio for 2013.

In part 1, we highlighted the investment plan and strategy for the portfolio and parts 2-10 will highlight
each sector in the S&P 500, including high-rated stocks with in each sector that you should consider for
your portfolio. Below is a schedule of the entire series. Please make sure to "follow"  us so that you will be
notified when each new article is published.
 As we highlighted in Part 1, just because a stock has a high Parsimony composite rating, it doesn't
necessarily mean that you should run out and purchase it that day. We believe that patiently waiting
for a low-risk entry point for a given stock will drastically improve your long-term investment
results. We call these entry points our "Buy Zones" and they are points at which long-term dividend
investors should feel comfortable starting to build a position in the respective stocks. We focus on four key
levels of support when determining a "Buy Zone":
 Technical - Support from short and long-term trend lines (i.e, 10-week and 40-week moving
average).
 Volatility - Target correction levels based on historical volatility and maximum draw down.
 Valuation - Support levels based on historical valuation multiple.
 Yield - Support levels based on forward dividend yield.

We then average the low end and the high end of these key support levels to determine our target "Buy
Zone".

It should be noted that this is how we determine our "Buy Zones", but there are no right or wrong answers
here. We encourage investors to think hard about the key levels of support for their own stocks. What is
the valuation level that you would feel comfortable buying a certain stock? What yield level makes sense
for you? Also, you may want to add different parameters that fit your investment style better. The key
takeaway here is that you establish a consistent process for determining a "Buy Zone".

Sample "Buy Zones"

Part 2a of the series highlighted some our top-ranked dividend stocks in the Consumer Staples sector.

As a follow up to Part 2a, below are our target "Buy Zones" for each of these top-rated Consumer Staples
stocks.
Wal-Mart Stores (WMT) sold off in early November and the stock is currently trading approximately 12%
below its recent high. WMT is getting support at its 40-week moving average ($68.57) and we believe that
this level will hold given the stock's long-term uptrend. In addition, WMT is trading below 14.0x forward
earnings (1/31/13), which we believe is an attractive valuation for the business.

Hormel Foods (HRL) broke out to a new 52-week high recently and we suggest that investors wait for a
pullback to open a new position. Prior to breaking out, the stock bounced around between $27.00 and
$30.00 and we believe HRL will dip back into that range on any weakness. The company recently
announced a 13% increase in its annual dividend and the lower end of our "Buy Zone" would give you a
yield-on-cost of close to 2.5%.
General Mills (GIS) also hit a new 52-week high recently and we don't think that investors should chase
the stock here. We are targeting an 8-10% pullback from current levels, which we believe would be a great
low-risk entry point. At the low-end of our "Buy Zone", the stock would have a forward P/E multiple of
approximately 14.0x and a yield-on-cost of 3.5%.

Kimberly Clark (KMB) has bounced around between $82.00 and $88.00 over the past six months, but
the stock has failed to make a new high on the last two rallies. That said, we think KMB could test its 40-
week moving average ($81.37) in the coming months and we would be a buyer if the stock dipped below
this level. The company has a nice dividend yield of 3.5% and it has increased its dividend for 40
consecutive years.
Colgate Palmolive (CL) has also traded in a short-term range ($102.00-$108.00) over the past six
months. As with all of these stocks, the long-term trend is very strong, but we would like the stock to
pullback a bit more before pulling the trigger. We are targeting an 8-10% total pullback for CL from its
recent high, which we believe will be a low-risk entry point for long-term investors. At the low-end of our
"Buy Zone", the stock would have a forward P/E multiple of approximately 18.5x and a yield-on-cost of
2.5%.
Cash-Secured Put Analysis
We often use a cash secured put strategy to generate income while we patiently wait for the "Buy Zones"
on high-rated stocks that we are stalking (see Part 1 for further details). We try to make sure our
break-even price on the option trade is in or below our target "Buy Zone". In other words, a cash-
secured put is like putting in a limit order to buy a stock at a lower price ... except that you get paid for it!
On average, the options below have a 3-5 month premium (income) yield of 2.4% with a
margin of safety of 6.1%. Note: We prefer utilizing options with expiration dates that are at least three
months out to reduce trading costs.

Summary

Investors should consider all of these great stocks for their DIY Dividend Portfolio, but please be patient
with your entry points.
That said, Wal-Mart is currently in the "Buy Zone". Feel free to pull the trigger on that stock immediately.
Investors should use their discretion with the other stocks in the short-term as we believe these stocks will
eventually hit our "Buy Zones".

Good luck out there ... be safe!

Utilities
While the Utilities sector has barely kept pace with the broader market over the past 5 years, it has by far
the highest average dividend yield (4.1%) of any sector in the S&P 500.

From a risk-reward perspective, the Utilities sectors has the lowest average beta (0.48) of any sector in
the S&P 500. Stocks with low betas tend to be less volatile than the general market, which will help
dampen overall portfolio volatility.

That said, below is a list of some our top-rated dividend stocks in the Utilities sector. Note that our
composite rating ranges from 0 (lowest)to 99 (highest).

The stocks on the list above have an average current dividend yield of 3.7% and an average 5-year beta
of 0.35. Also, all of these stocks have significantly outperformed the S&P 500 over the past 5 years (on a
total return basis), despite the sector as a whole underperforming. The tables below highlight some of the
key data points that we analyze when ranking our dividend stocks.
Wisconsin Energy (WEC) has delivered shareholders a 75% total return over the past five years, and it
has increased its dividend at a compound annual rate of 18.8% over that period. In addition, the company
still has a very modest payout ratio of 47.5%, so it has plenty of room to continue to increase its dividend
in the future. In fact, the company recently announced that it is planning to raise its quarterly dividend to
$0.34 a share in the first quarter of 2013, which would represent a 13.3% increase over the current

quarterly rate.
Cleco Corporation (CNL) has a long and stable dividend track record. In fact, the company has paid
dividends to its shareholders since 1935. That said, up until 2010, CNL had not increased its dividend
since 2002. However, the company seems to have turned over a new "dividend growth" leaf recently as it
has increased its dividend at a compound annual rate of 12.3% over the past 3 years.

While Aqua America (WTR) has the lowest dividend yield of this group, the company has increased its
dividend at a compound annual rate of 14.4% over the past 10 years. WTR recently increased its quarterly
dividend by 6.1%, which was its 22nd dividend increase in 21 years. Aqua has paid a consecutive
quarterly dividend for more than 65 years.
 Although Southern Company (SO), has grown dividends at a slower pace over the last 10 years than
many of its peers, the company's 10-year dividend growth rate (3.6%) has still exceeded the rate of
inflation (which is important for dividend growth investors). In addition, Southern Co. has one of the
higher current dividend yields (4.5%) in the space.

Many dividend growth investors may have overlooked Hawaiian Electric (HE) because it hasn't raised its
dividend in 15 years. However, the company has paid a stable dividend since 1901 and it has delivered
shareholders a very respectable 43% total return over the past 5 years (thanks in part to its hefty 5%
dividend yield). While HE may not raise its dividend in the future, we think that dividend investors should
still consider it for their DIY Dividend Portfolio because its certainly a dividend you can count on!
Conclusion

In general, Parsimony ratings for the Utility sector as a whole are relatively low, but there are definitely
some companies that have pulled ahead of the rest of the pack. While we believe that all DIY Dividend
Portfolios should have a few Utility stocks sprinkled in, its critical to choose your investments in the sector
very carefully.

Utilities 'Buy Zones'

s we highlighted in Part 1, just because a stock has a high Parsimony composite rating, it doesn't
necessarily mean that you should run out and purchase it that day. We believe that patiently waiting
for a low-risk entry point for a given stock will drastically improve your long-term investment
results. We call these entry points our "Buy Zones" and they are points at which long-term dividend
investors should feel comfortable starting to build a position in the respective stocks. We focus on four key
levels of support when determining a "Buy Zone":
 Technical - Support from short and long-term trend lines (i.e, 10-week and 40-week moving
average).
 Volatility - Target correction levels based on historical volatility and maximum draw down.
 Valuation - Support levels based on historical valuation multiple.
 Yield - Support levels based on forward dividend yield.
We then average the low end and the high end of these key support levels to determine our target "Buy
Zone."
It should be noted that this is how we determine our "Buy Zones," but there are no right or wrong
answers here. We encourage investors to think hard about the key levels of support for their own stocks.
What is the valuation level that you would feel comfortable buying a certain stock? What yield level makes
sense for you? Also, you may want to add different parameters that fit your investment style better. The
key takeaway here is that you establish a consistent process for determining a "Buy Zone."
Sample "Buy Zones"

Part 3a of the series highlighted some our top-ranked dividend stocks in the Utilities sector.

As a follow up to Part 3a, below are our target "Buy Zones" for each of these top-rated Utility stocks.

Wisconsin Energy (WEC) has a current forward yield of 3.7% (including the company's recently
announced dividend increase for 2013). The stock is hovering around the $37.00 level, which is where the
10-week and 40-week moving averages are converging. WEC is now down over 12% from its recent high
and we believe that this is a great long-term entry point for investors.
Cleco Corp. (CNL) currently has a forward dividend yield of 3.4%. The stock is down over 12% from its
recent high and it is getting support around the $39.00 level. The 10-week moving average recently
dipped below the 40-week moving average, but we believe that this crossover will be short-lived and we
expect the stock's long-term uptrend to continue.

Aqua America (WTR) is currently consolidating after a nice run from April through July. We believe that
this is a "healthy" pullback for the stock and we would be a buyer on any further weakness. We expect
WTR to get support at its 40-week moving average ($24.22) and investors should watch this level closely.
Southern Company (SO) has one of the highest dividend yields (4.6%) in the utility space and we
believe the stock is a great long-term buy right now. SO is down almost 13% from its recent high and
don't expect the stock to trend too much lower from here.

Hawaiian Electric (HE) has a very attractive 5.0% dividend yield and investors should consider starting
a position in the stock at current levels. HE recently got support around the $24.00 level (which was the
previous low from April 2012) and we believe that the stock will head higher from here. The company has
paid a stable dividend since 1901 and it has delivered shareholders a very respectable 43% total return
over the past 5 years.
Summary

Building a DIY Dividend Portfolio is a marathon, not a sprint. Don't put pressure on yourself to have a fully
diversified portfolio overnight. The various sectors will offer good buying opportunities at different times;
you just need to recognize them when they are there. That said, we believe now is a great time to add
some Utility stocks to your portfolio.