Important forecasts for the stock market in 2012 …

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 my 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 utilities WILL 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