People always want to know what sectors are going to work in a new year. Makes sense, as a great deal of a stock's move does depend on its sector -- perhaps too much, because of what I've been calling the "ETF-ization" of stocks, where the group a company belongs to hangs together by an ETF instead of trading separately, even a little bit, on the merits.
That's why I think the sector that will perform the best, again, in 2012, is the dividend sector, the segment of companies that reward you, that pay you to wait, while the company gets it act together or just simply puts on more cream to the cake. If anything, what we've seen lately is that the cream has been the source of a huge part of the performance of a stock, and that will continue.
Jeremy Siegel, the brilliant Wharton professor of business, has been chronicling stocks for years, and he has always stressed the importance of the total return from stocks, because some 40% of the performance over time has come from dividends.
In an era when you can have sharp swings, which seem to have disappeared for the moment in this era of good feelings, but which deeply influenced stocks in 2011, dividends saved the day. The combination of a Fed chairman who has point-blank said he's leaving rates low for a couple of years and the dastardly swings from program trading and double- and triple-leveraged ETFs made dividends the safest and most lucrative plays out there. It actually paid to take less risk, not more, as defined by whether a payout was good or not.
Stocks such as Kinder Morgan Energy Partners (KMP), Verizon (VZ) and Consolidated Edison (ED), names I came back to again and again, just delivered superb performance, as did Big Pharma. Was it really a coincidence that Bristol-Myers Squibb (BMY), Eli Lilly (LLY) and Pfizer (PFE) all generated amazing returns? No, given their phenomenal return compared with Treasuries.
I am sure that there will be people who say, "Jim, the trade is over." To them I say, do you really think that this beginning-of-the-year move can last when we will still have scare after scare coming out of Europe and the possibility that earnings estimates remain too high?
Dividends bore people. But this holiday, I bumped into enough people who talked about their butts being saved -- their term -- by my dividend names. I know that many of the yields are too puny for the moment, but there are plenty that aren't, like Nordic American Tankers (NAT), with dayrates still climbing, or Southern Copper (SCCO) or Energy Transfer Partners (ETP).
I like to contradict Gordon Gekko. Greed, as defined by the need to have no capital preservation, just capital gains, is not good. Boring is good. Count me as a boring guy, at least when it comes to selecting stocks with dividends as key to the future performance.