I. Consumer Defensive (12%)The Consumer Defensive sector includes consumer goods, which are items purchased for personal or household use. These would include items such as soap, detergent, cleaning supplies, toilet paper, toothpaste, candies, sodas, etc. These tend to be non-cyclical and many of the products are low cost. Since the demand for these products are less affected by the economic cycle and the industries are mature, the companies tend to generate relatively stable and predictable cash flows. These characteristics are exactly what you look for in a great dividend company. Below are some examples of companies in the consumer goods sector:
Colgate-Palmolive Company (CL) is a major consumer products company that markets oral, personal and household care and pet nutrition products in more than 200 countries and territories. Yield: 2.2%
General Mills, Inc. (GIS) is a major producer of packaged consumer food products, including Big G cereals and Betty Crocker desserts/baking mixes. Yield: 3.1%
Kimberly Clark Corp. (KMB) is a global consumer products company's producing tissue, personal care and health care products. Its brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex and Scott. Yield: 3.3%
The Coca-Cola Company (KO) is the world's largest soft drink company, KO also has a sizable fruit juice business. Yield: 2.9%
The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries. Yield: 3.0%
II. Financial Services (14%)Have you ever had to pay a bank fee, origination point on a loan, or have you ever filed an insurance claim and were not satisfied with the amount of money you received? Financial stocks are cash cows - they generate large cash flows with minimal capital and ongoing expenses. Historically, these have been some of the best dividend growth stocks, at least until the industry became overly aggressive and made bad operating and investing decisions. Here are several financial companies that survived the last downturn:
Aflac Incorporated (AFL) provides supplemental health and life insurance in Japan (80% of earnings) and the U.S. Products are marketed at work sites and help fill gaps in primary coverage. Yield: 2.1%
Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations. Yield: 3.4%
T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund complexes in the United States. Yield: 2.0%
III. Industrials (18%)Companies classified as industrial materials are those engaged in the manufacturing or production of machinery, raw materials or component parts for use or consumption by other industries or firms. These companies don't make the consumer goods, but they make the machinery and supply the raw materials that are used to manufacture them. Many of these companies are mature with established markets, strong customer relationships and often hold an exclusive right to their proprietary manufacturing process. Below are some companies in the industrial materials sector:
Emerson Electric Co. (EMR) designs and supplies product technology, and delivers engineering services and solutions to a wide range of industrial, commercial and consumer markets around the world. Yield: 2.5%
Illinois Tool Works Inc. (ITW) is a diversified manufacturer operates a portfolio of 60 business units that serve industrial and consumer markets globally. Yield: 2.2%
Lockheed Martin Corp. (LMT), the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales. Yield: 4.1%
3M Co. (MMM) is a diversified global company that provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives, and other chemical additives. Yield: 2.1%
It is no surprise the above three sectors carry the highest allocation in my income portfolio. To keep my asset allocation balanced, I must overweight other sectors in my non-income portfolios. In the same way that too many deserts will expose you to unnecessary health risks, being over-allocated in any sector put your portfolio at risk.
Full Disclosure: Long KMB, KO, PG, AFL, CINF, EMR, ITW, LMT, MMM in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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