{mp3}David-Bensimon-Jan-7-2012{/mp3}

Last week I told you why I continue to insist that most investments I recommend pay for themselves through steady income generation, and why capital appreciation is merely a natural byproduct of that philosophy.

However, I didn’t get specific on particular investment areas to consider in the new year. So today, I want to take a deeper look at the stock market by telling you what areas were the best performers last year as well as what sectors may hold the most promise as 2012 gets underway.

So let’s start with …

A Look Back at the Stock Market in 2011

For the full year, the S&P 500 ended just a bit lower — .0028 percent, technically — than it began 2011.

BUT, and this is an important one, the index managed to eke out a 2.11 percent total return for the year once you factor in dividends.

So right there is an important lesson: Dividends can literally mean the difference between a losing year and a winning one!

Of course, I really pay a lot of attention to how the S&P 500’s ten individual sectors perform because it tells us a lot about general market sentiment along with where future opportunities might lie.

Here’s last year’s sector-by-sector performance breakdown:

Energy: +2.77 percent 

Materials: -11.64 percent

Industrials: -2.92 percent

Consumer Discretionary: +4.41 percent

Consumer Staples: +10.53 percent

Health Care: +10.18 percent

Financials: -18.41 percent

Information Technology: +1.33 percent

Telecom: +0.84 percent

Utilities: +14.83 percent

As you can see, consumer staples, healthcare and utilities were far and away the three best-performing sectors in 2011.

How does this jibe with what I said right here in my Money and Markets sector forecast last year?

Well, at the risk of bragging a bit too much, it’s EXACTLY what I predicted. Specifically, I said:

“While they were busy piling into discretionary, materials and industrials, the bulls trampled past dividend rich areas like utilities and health care in 2010.

“To me, that implies even more value and profit potential in these sectors going forward.

“What about the consumer staples stocks — makers of food, beverages, tobacco, and other household products? This group of companies performed about in line with the market average last year … and I think they can certainly continue to rise in 2011.

“In terms of last year’s top-performing sectors: I am less excited about the economically-sensitive areas. Reason: The easiest money has likely been made already. And should data even hint that the economy is slowing back down, the highest-flying stocks will fall the hardest.”

Along with my relentless focus on dividends, I think these correct sector calls are precisely what allowed BOTH of the portfolios in m Income Superstars newsletter to outperform in 2011.

My dad’s real-money retirement portfolio ended the year up 5.8 percent — nearly TRIPLING the total return of the S&P 500 — while about half of his money remained in cash!

Meanwhile, my long-standing Dividend Superstars portfolio did even better, producing a total return of 9.75 percent in 2011!

[Editor’s note: Perhaps the most amazing part of this is not Nilus’ track record, but the fact that you can get an annual subscription to his newsletter for just $39!]

Of course, I know as well as anyone that it’s a whole new year and “you’re only as good as your last game.”

So What Areas of the Stock Market Am I Most Bullish on for 2012?

Let me start by saying that consumer staples, healthcare and utilitiesWILL remain major allocations for my portfolios this year.

But that is more because they should continue throwing off great income and less because they are attractive for outsized gains yet again this year.

Rather, if I had to name the sector that is most likely to soar in 2012 I would have to say it’s the financials.

Yes, I know that might sound shocking. But just look how badly these companies got beaten up last year!

No doubt they ARE suffering from some very real problems — consumer ire, questionable balance sheets, the sovereign debt crisis in Europe, and whole lot more.

At the same time all of these problems are well known, and I think many of them will fade as 2012 wears on. Others may already be overblown to begin with, too.

Does that mean I’m going to tell my subscribers to load up on financial companies then? Nope.

The reason: After getting slammed so hard during the 2008 financial meltdown, the sector is still not paying nearly enough in dividends to make it a huge component of either Dad’s Income Portfolio or the Dividend Superstars list.  

So I will simply look for ways to get a bit more income-focused exposure to the group this year. In fact, I’ve already made a new recommendation for my dad’s portfolio that is a really unique way to play the group. He hasn’t gotten filled on the order yet but I believe he’ll get a chance to buy it soon.

Of course, if you’re more of a risk taker — or if income is less of a concern for you — then I would also seriously consider more aggressive ways to play the financials as 2012 gets underway.

One other area that I think holds real promise this year is energy — specifically, higher-yielding pipeline plays. Look for more on these companies — and other niche dividend-paying resource companies — in future columns.

For the rest of the major market sectors, I believe the name of the game will be individual stock selection rather than broad trends driving everything higher. And I believe dividend payers will definitely remain the best choices in more cyclical areas such as materials and industrials.

In other words, I’m really looking forward to another great year ahead!

Best wishes,

Nilus

To say that markets have been volatile in 2011 is an understatement. Uncertainty regarding the outcome of the ongoing European debt crisis continues to be the primary cause of market gyrations, yet other factors have come to bear as well, including the Arab Spring, the earthquake and reactor meltdown in Japan, monetary tightening and inflation in China, sovereign debt downgrades, and devastating floods in Thailand. In our opinion, all of these events have driven volatility, but not the overall market trend. We believe the overall market trend has been led by a push-pull relationship between the private sector trying to deleverage and the world government maintaining ultra-easy monetary and fiscal policy.

Over the holidays we tempted fate by booking a multi-stage plane trip … and ended up with cancelled flights, missed connections, and blank-faced airline employees who sincerely didn’t care if we spent a night or a week on the terminal floor.

While I wallowed in self pity over this loss of control, my wife noted that it’s not just the airlines. Big Food, Big Pharma, and the big banks, among others, are all just as customer-unfriendly. This distracted me from my rage and I spent some time thinking about how strange it is that in a time when Apple is creating Star Trek-level gadgets that streamline and simplify their users’ lives, and Amazon is making shopping almost supernaturally easy, there are huge industries that seem to go out of their way to make their customers’ lives complicated and hard.

Why do they do this when it makes so many people so mad? A pharmaceutical company CEO, for instance, probably can’t leave the house without someone accusing him of doubling the price of a crucial prescription drug while spending millions marketing erectile dysfunction pills to TV football viewers. An industrial food company exec can’t attend a cocktail party without being cornered by someone who reads labels and is appalled by trans fat, high fructose corn syrup-laden “food”. Goldman Sachs execs must cringe every time they pass a newsstand where the latest Rolling Stone is calling their company a “vampire squid”.

 And airline employees, of course, must be abused non-stop by people like me who have had their vacations turned into exercises in enforced patience and asymmetrical negotiation. South Park caught the general mood perfectly with this episode. (Ed Note: A very very rude episode of SouthPark and not necessary to watch to get the point of this article)

Anyhow, on a different vacation this line of thought might have been nothing more than a way to occupy a pissed-off mind for an hour or so. But this time I had James Rickards’ new book Currency Wars on my Kindle (a device from customer-friendly Amazon that makes my life simpler and easier), and while waiting for a flight I came across this:

The third principal is that complex systems run on exponentially greater amounts of energy. This energy can take many forms, but the point is that when you increase the system scale by a factor of ten, you increase the energy requirements by a factor of a thousand, and so on. The fourth principal is that complex systems are prone to catastrophic collapse. The third and fourth principals are related. When the system reaches a certain scale, the energy inputs dry up because the exponential relationship between scale and inputs exhausts the available resources. In a nutshell, complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.

That’s a pretty good framework for understanding these huge, complex, mostly dysfunctional industries. They’ve spent decades consolidating and concentrating and now have to generate sales on pretty much any terms, no matter how questionable, in order to avoid death by complexity. The customer takes a back seat to the desperate institutional need to survive and the product gets crappier and crappier until the production/delivery system breaks down.

The same dynamic is at work in the global financial system, says Rickards. In the US, a dollar of new debt produced nearly that much in new GDP in the 1960s. But today the return on new debt is negative. From here on, we can borrow as much as we want and the only result will be more debt. Wealth won’t increase at all. But we can’t stop; as with any other Ponzi scheme, the choice is more debt or instant bankruptcy.

This stage is generally followed by catastrophic failure, with the only question being what else the financial system takes down with it. As Rickards puts it:

A considerable challenge arises when one considers the interaction of human behavior and market dynamics. The complexity of human nature sits like a turbocharger on top of the complexity of markets. Human nature, markets and civilization more broadly are all complex systems nested inside one another like so many Russian matryoshka dolls….When you apply this paradigm to finance, you begin to see where the currency wars are headed.

About Dollar Collapse:

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.