Industrials also have the greatest proportion of high-quality stocks of any other U.S. market sector, according to Merrill Lynch, and many of those have the added attraction of being mega caps; Caterpillar, for example.
Plus, the industrials sector trades below its historical average P/E, Merrill notes, particularly conglomerates or companies in the machinery business.
At S&P Capital IQ, analysts single out building products, home repair and remodeling stocks as solid investments in the aftermath of Hurricane Sandy and due to the housing recovery.
Investors eyeing the industrials sector could start with the exchange-traded SPDR Industrials or Vanguard Industrials ETF.
9. Technology plugs in
Technology stocks came under pressure late in 2012, but the sector’s oversized exposure to non-U.S. markets could work in its favor next year, according to Merrill analysts.
Tech companies also tend to have strong cash flow, little debt and some pay dividends.
“Improved visibility on the domestic policy front coupled with signs that Europe is beginning to heal could have very positive implications for capital spending and global growth,” a Merrill research report recently concluded.
S&P Capital IQ sees improved demand for semiconductor equipment, considered one of technology’s most cyclical areas.
Turner, the strategist at Turner Investments, is bullish on Qualcomm Inc. based on its dominant share of the tablet computing market.
Turner also favors Apple now that the shares have been beaten down some.
“The risk- reward is quite compelling,” Turner says. “Where else are you going to find 25 percent growth rates for 10 times earnings?”
10. ‘Dogs of the Dow’ have bark and bite
For a hefty helping of size and income that plays into both the mega cap and dividend themes, investors can scoop up the 10 highest-yielding stocks in the Dow Jones Industrial Average, also known as the “Dogs of the Dow.”
This value-oriented tactic calls for buying the index’s 10 highest-yielders at the start of each year. The Dogs didn’t hunt so well in 2012, gaining just over 7 percent on a price-only basis through Dec. 20 versus a 9 percent return for the 30-stock benchmark itself.
As of Dec. 20 the 10 would be AT&T, DuPont, Hewlett-Packard, Intel, Johnson & Johnson, McDonald’s, Merck & Co., Microsoft, Pfizer and Verizon Communications. These stocks yield 4 percent on average, according to Merrill Lynch.
Two exchange-traded proxies for the Dogs strategy: Elements Dogs of the Dow ETN, which is linked to the Dow Jones High Yield Select 10 Total Return Index, and ALPS Sector Dividend Dogs ETF, which actually picks from among S&P 500 stocks. In addition, Dogs account for six of the top-10 stocks in iShares High Dividend Equity Fund.
Some of these Dogs fit the “safety and income at a reasonable price” theme that David Rosenberg has been vocalizing for some time now. The chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates tells clients to squeeze as much income out of a portfolio as possible, the better to handle an investment environment where slow-growth and austerity reign.
Says Rosenberg, writing in a recent research note: “A reliance on reliable dividend yield and dividend growth makes perfect sense.”