Thursday, September 17, 2015

What sectors do I own in my portfolio?

I saw an interesting chart on FINVIZ's website that showed all the largest US companies in a treemap. They are sized according to their market cap. I decided to go through the groups and highlight what I owned.


Keep in mind that the size of the boxes are the company's market cap relative to the US stock market. Some companies I own are too small to be seen in this large map. Some of their categories are kind of weird though, for instance AAPL I would think more of as a Tech company.

This exercise showed me that I have a tendency to avoid tech and financial stocks. My companies are heavily consumer goods and healthcare. Plotting a pie chart of my portfolio sector weightings shows that I have to work on adding more in several sectors.


My preference for sectors is:
Staples > Healthcare > Discretionary > Utilities > Industrials > REIT > Energy > Financial > Telecom > Tech > Materials

My preference right now in the coming months is to add more to utilities and industrials.

My favorites are staples. They provide products everyone uses all the time no matter the economic situation. This helps guarantee the dividend and dividend growth. As time moves on and inflation kicks in, consumers will help fund the growth of the dividend to at least meet inflation. In recessions, people will still continue to shower, eat food, use the bathroom, and drink beverages. My favorite so far is MO.

My second favorite is healthcare companies. They provide us a service that people will be forced to pay for eventually if they want to stay healthy. The growing age of the American population will also demand more from this sector. My favorites that I own so far are JNJ and BDX. I have several names in drugs, medical tools/appliances, and biotech sections. I however want to eventually own something in the healthcare plans sector to complete the picture. I am eyeing big names like CVS, UNH, and ESRX all of which have speculator growth prospects and consistent earnings.

Discretionary stocks are more volatile but they have higher growth. Usually they have lower yield but higher dividend growth rates. Most of my holdings in this sector are speculative, as I do not have many core holdings in this sector. I will eventually like to own Home Depot or Lowes one day.

Ever since I started DGI, I have been waiting for the fed to raise rates before I add more to utilities. Hopefully tomorrow the FOMC meeting announces a rate hike but I have a feeling the fed will do nothing. Utilities are quite attractively valued at the moment and I have my eyes on the quality names like D and NEE, which can be seen in the FINVIZ plot above.

I find industrials to be very important for diversity in my portfolio but not essential. I prefer to own the highest quality dividend aristocrats in this category due to the highly cyclical nature of the sector. My favorites are MMM and UTX, both have long histories of dividend increases and steady earnings.

Financials: I have a dislike for banks but am willing to own service companies like Visa or Mastercard. I do not have a real desire to own insurance or fund management companies either. REITs can be classified as a financial but I group them in their own REIT category. In general I am rather hesitant to own most REITs except "O".

Telecom stocks I only want to own two names: T and VZ. I find the sector to be very low growth and both companies have huge debt. I own these companies for the yield. I don't expect them to grow much. The industry is capitally intensive and price wars are threatening. Since I only want to hold these two quality names, the weightings for this sector will always be low. 

Although I work in the tech industry, I try to avoid it in my portfolio. The industry is too volatile and unpredictable.  Companies must always continue to be cutting edge or face eventual death. This can be seen with old companies like IBM. The only companies I am willing to own that is a quality DGI stock is ADP, but it's too expensive. I hold Apple for speculative reasons only. Due to my preferences, the tech sector will always be a small % of my portfolio.

Energy and materials are highly cyclical sectors for me, which makes me want to keep my exposure on the lower side. Like REITs, I do not trust many names in this cyclical sector. The only name I trust is "XOM". I can sleep well at night with XOM like I can with staple stocks like CL or KO. Every other energy company has me a wee-bit nervous during a downturn (like now!)

For materials, I tend to want to avoid industries like metals, timber, and mining. The sector is way too volatile (take a look at BBL's stock graph for instance). The companies are heavily dependent on commodity prices, which has a tendency to fluctuate wildly.  prefer guaranteed earnings which helps me sleep better knowing that dividends will be covered with good quality earnings. The only names I want to own in this sector are "PX" and "APD", both are solid dividend growth names with very consistent earnings. Since I do not have a large desire to own a lot of material stocks, the sector will always be a small %.


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