Top 10 Dogs In 8 Sectors Show Big Net Gains

by: Fredrik Arnold

A once per year trading system triggered by yield, called the "Dogs of the Index" is used by many investors to determine the best of the best dividend stocks. The dogs system empowers investors with all the wisdom and knowledge of well-paid wizards of investment and publishing for free, as investors select the highest yielding and lowest priced constituents in a collection of equities built by experts.

This periodic installment summarized eight yahoo finance and y-charts business sectors (in alphabetical order): basic materials; consumer goods; financials, healthcare; industrial goods; services; technology; utilities. Sector results were compared to the Dow industrials based on relative strengths of (1) yield and (2) dividend vs price gaps using projected annual dividends from $1000 invested in the ten highest yielding stocks in each sector as of November 16. Results for the Dow index provided a baseline.

Deconstructing eight sectors is one article provided a useful guide to eight currently undervalued stocks in each sector deemed by a quorum of analysts as showing significant upside price potential in addition to substantial dividend yield.

This effort was part of an ongoing one to respond to the question, "which dividend stocks were good, better, best, bad, or ugly, after November?"

The research was also in keeping with Yale professor Robert Shiller's observation: "People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes." Thus this article graphically depicted the gyrations.

Dogs of the Index Metrics Selected Ten in Each Group

Two key metrics determined the yields that ranked index or sector dog stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declared the percentage yield by which each dog stock was ranked.

Historically dividend dog investors utilized this ranking system to select portfolios of five or ten stocks in any one index, sector, or survey to trade. They awaited the results from their investments in the lowest priced, highest yielding stocks and prayed that the price of every stock they now owned climbed higher (having locked in a high yield percentage at purchase).

This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), revealed how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) could be sold off once each year to sweep gains and reinvest seed money into higher yielding stocks in the same index. Prior to the publication of O'Higgins book, Dow dogs were known by some market watchers as "fallen angels."

Sector Synopses

Ten dogs for each sector displayed their annual dividends from $1000 invested in those highest yielding stocks in the sector and index compared to the aggregate single share prices of those top ten stocks to produce the summary graphs shown below:

Basic Materials Dividend Dogs

Top ten basic materials stocks paying the biggest dividends in November mostly represented oil and/or gas industries: Whiting USA Trust I (NYSE:WHX), a driller; SandRidge Mississippian Trust I (NYSE:SDT), an independent; Sandridge Permian Trust (NYSE:PER), an independent; Whiting USA Trust II (WHZ), an independent; Chesapeake Granite Wash Trust (NYSE:CHKR), an independent; VOC Energy Trust (NYSE:VOC), an independent; MV Oil Trust (NYSE:MVO), a driller. Just four of the top ten basic materials firms did not mention oil or gas in their industry description: Great Northern Iron Ore Properties (NYSE:GNI), a steel and iron concern; Oxford Resource Partners (OXF) a metal and minerals firm; Rhino Resource Partners (NYSE:RNO) a nonmetallic mineral miner.

Consumer Goods Dividend Dogs

Top ten consumer goods stocks showing the biggest dividend yields in November represented eight industries. Tops was the one equipment firm listed, Pitney Bowes (NYSE:PBI). Second dog, Vector (NYSE:VGR) was one of three from the cigarettes industry. Other top ten dogs in the same cigarettes industry group were Reynolds (NYSE:RAI), seventh, and Altria (NYSE:MO), eighth. The one rubber & plastics firm listed, Deswell Industries (NYSEARCA:DES) was third. One personal products industry firm, CCA Industries (NYSEMKT:CAW), placed fourth. One sporting goods firm, Escalade (NASDAQ:ESCA) was fifth by yield. The balance of the top ten were: auto parts firm, Douglas Dynamics (NYSE:PLOW) in sixth; packaging firm, Greif, Inc.(NYSE:GEF.B) in ninth; textile-clothing firm, Crown Crafts (NASDAQ:CRWS), was tenth.

Financial Dividend Dogs

Top ten financial sector dogs showing the biggest dividend yields after September represented six industries. Top financial sector stock, Mesabi Trust (NYSE:MSB) was a diversified investments firm. New York Mortgage Trust (NASDAQ:NYMT), in second, was one of six REITs in the top ten. Five including New York Mortgage Trust, Apollo Residential Mortgage (NYSE:AMTG), American Capital (NASDAQ:AGNC), Armour Residential REIT (NYSE:ARR), and CYS Investments (NYSE:CYS) were residential REITs; American Capital Mortgage (NASDAQ:MTGE) was a diversified REIT. The remaining three industries were represented by Arlington Asset Investment (NYSE:AI), an investment brokerage, Life Partners (NASDAQ:LPHI) doing insurance, and Alto Palermo (NASDAQ:APSA) in property management.

Healthcare Dividend Dogs

Ten healthcare sector stocks showing the biggest dividend yields after November represented eight industries. Top healthcare sector stock PDL BioPharma (NASDAQ:PDLI) was one of two biotechnology firms in the top ten. Heska Corporation (NASDAQ:HSKA) was the other and took sixth place. Nordion (NYSE:NDZ) in second place represented specialized health services. PetMed Express (NASDAQ:PETS), in third represented drug delivery firms. GlaxoSmithKline (NYSE:GSK) in fourth position was one of four drug manufacturers. Bristol-Myers Squibb Company (NYSE:BMY) in seventh, and Eli Lilly (NYSE:LLY) in eighth, were the other drug manufacturers - major firms. Warner Chilcott (NASDAQ:WCRX), a drug manufacturers - other firm, placed tenth. Psychemedics (NASDAQ:PMD) appeared fifth as a medical laboratories and research firm. Advocat Inc. (AVCA), providing long-term care facilities took ninth and completed the top ten healthcare dogs.

Industrial Goods Dividend Dogs

Ten industrial goods sector stocks showing the biggest dividend yields after November represented six industries. Top industrial goods sector stock, James Hardie Industries (NYSE:JHX), represented cement firms. Veolia Environement (VE) in second, was one of three waste management firms in the top ten. The others were Waste Management (NYSE:WM) in eighth place, and Ecology and Environment (NASDAQ:EEI), in ninth. Highway Holdings (NASDAQ:HIHO) a metal fabrication outfit, took third. Aerospace & defense products & services was represented by Lockheed Martin (NYSE:LMT) in fourth place, and TAT Technologies (NASDAQ:TATT) in sixth. Xinyuan Real Estate (NYSE:XIN) in fifth, does residential construction. The remaining two in the top ten represented one industry each: Servotronics Inc (NYSEMKT:SVT) in seventh, represented industrial electrical equipment, and Ampco-Pittsburgh Corporation (NYSE:AP), in tenth, represented diversified machinery.

Services Dividend Dogs

The top ten services sector stocks showing the biggest dividend yields in November represented four industries. Top four sector stocks were all in shipping: Tsakos Energy Navigation (NYSE:TNP); Capital Product Partners (NASDAQ:CPLP); Nordic American Tankers (NYSE:NAT); Star Bulk Carriers (NASDAQ:SBLK). The remaining three shippers were in slots six, eight and nine: Knightsbridge Tankers (VLCCF); Navios Maritime Partners (NYSE:NMM); Box Ships (NYSE:TEU). Department stores were represented in fifth place by Alon Holdings - Blue Square Israel (NYSE:BSI). Business services took the seventh slot represented by Collectors Universe (NASDAQ:CLCT). Grocery stores took tenth represented by Roundy's, Inc. (NYSE:RDY).

Technology Dividend Dogs

Top ten technology sector stocks showing the biggest dividend yields in November represented five industries. Top technology sector stock Portugal Telecom SGPS (NYSE:PT) was one of four wireless technology representatives. The other three wireless firms placed fourth, eighth and tenth: Vimpel-Communications (NYSE:VIP); Cellcom Israel (NYSE:CEL); NTELOS Holdings Corp. (NASDAQ:NTLS). Two telecom services - foreign firms took number two and three: City Telecom (H.K.)(CTEL), and France Telecom (FTE). MIND C.T.I (NASDAQ:MNDO) in fifth provides information technology. Telecom services - domestic in sixth and seventh slots was represented by Windstream Corporation (NASDAQ:WIN), and Consolidated Communications Holdings (NASDAQ:CNSL). SouFun (NYSE:SFUN) at number ten represented internet information providers.

Utility Dividend Dogs

The top ten utilities sector stocks showing the biggest dividend yields for November represented four industries: diversified; electric; gas; foreign. Top dog, Just Energy Group (NYSE:JE) was one of two diversified firms; TransAlta Corporation (NYSE:TAC) in eighth place was the other. Electric utilities were listed in second and fifth positions, Genon Energy (NYSE:GEN), and Atlantic Power Corporation (NYSE:AT). Five gas firms took positions three, four, six, seven, and ten: Niska Gas Storage (NYSE:NKA); American Midstream Partners (NYSE:AMID); Suburban Propane Partners (NYSE:SPH); Amerigas Partners (NYSE:APU), and PAA Natural Gas Storage (NYSE:PNG). One foreign utility, CPFL Energia (NYSE:CPL) was listed ninth.

Dow Industrial Dividend Dogs

Four technology firms led the Dow top ten showing the biggest dividend yields for November, according to (1) AT&T (NYSE:T); (2) Verizon (NYSE:VZ); (3) Intel Corporation (NASDAQ:INTC); (4) Hewlett Packard (NYSE:HPQ). The rest of the Dow ten included two healthcare dogs: (5) Merck (NYSE:MRK); (7) Pfizer (NYSE:PFE). One industrial made the dog list, (9) General Electric (NYSE:GE). Two basic materials firms were included (6) Dupont (NYSE:DD) and (8) Chevron Corporation (NYSE:CVX). A services firm, (10) McDonald's (NYSE:MCD) completed the ten top Dow dogs.

All Together Now

Each graph below shows eight points of comparison between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten high yield stocks (blue points) versus the total prices of one share of each of the ten stocks (green points). Grouped together the graphs display comparative gyrations of eight sectors and the Dow index.

Sector Dogs Vie for Dividend Dominance

The following graph shows annual dividends projected from $1000 invested in each of ten stocks with the top yields in eight sectors compared to those of the Dow. The chart plotted projected yields as of eight specific purchase points since January. Projected yields increased in the sectors when average stock prices fell. When prices escalated yields dropped.

Relative yield strengths differentiated the sectors. The Dow shows the lowest overall yields with a low trajectory upslope of 6.5% since January. Healthcare was down 2.17% for the period; industrial goods yield jumped 10.7%; consumer goods yield popped up 9.83%; utilities sparked 7.36%; technology increased 19%; services sector also vectored up 11.16% by yield since August; financial yields were down 2.66%; basic materials popped up 11.45% since August.

Annual Dividends Forecast from $1k Invested in each of 10 Top Yielding Stocks in 8 Sectors & the Dow

Relative Risk by Sector Gauged by Dividend vs. Price Divergence

A reader request to "add relative financial data on the companies selected" for a previous article comparing indices by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 5 or 10 Dogs of the Index stocks at any point during the year. This information will continue to be reviewed monthly as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."

Dogfight for Dividend Dominance Decided

To show risk the gap between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten highest yielding stocks in an index or sector is measured against total prices of one share of each of those ten stocks in that same index or sector. These eight representative market indices displayed their relative divergences of dividend vs. price in the following order:

The services sector maintained top risk status as of mid-November as it showed 2008.47% divergence of dividend projected from $1000 invested in each of it's top ten stocks from the aggregate single share price of those ten. Technology showed 1,235.99% divergence; financials diverged 898.87% in November; basic materials showed a gap of 692.86% between dividend and price; the average gap for the eight sectors plus the Dow was 651.82%; utilities aggregate single share stock price diverged 369.51% from dividends projected for $1k invested in each of the ten; consumer goods showed a 319.7% gap; healthcare diverged 191.57%; industrial goods dividends diverged 153.41% from price; Dow industrial top ten dogs however continued to show an overbought status as aggregate single share price exceeded dividends from $1k invested in each by 4.01%.

Actionable Conclusion: Analysts Forecast Dogs in 8 Sectors To Show 22% to 60% Net Gains

Charts below for each sector show comparative net gains as of November 16, 2012 and those projected to November 16, 2013. Historic aggregate single share price of the ten highest yielding stocks created the numbers for 2012. Projections based on aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2013 numbers for each index.

Five dogs from each index were selected as sells based on highest net gain. The hypothetical sale of those stocks added to the projected dividends revealed the total net for each sector. Since $10k is the initial investment, the percentage net gain is easy to calculate for each.

The number of analysts contributing to the mean target price estimate for each stock is noted in the last column on the charts. Three to nine analysts is considered optimal for a higher probability projection estimate.

Basic Materials Analysts See Near 60% Net Gains

Financial Sector Analysts See Near 59% Net Gains

Technology Analysts See Near 43% Net Gains

Services Sector Analysts See Over 40% Net Gains

Consumer Goods Analysts See Over 37% Net Gains

Utilities Sector Analysts See Near 26% Net Gains

Industrial Goods Analysts See Near 24% Net Gains

Healthcare Sector Analysts See Over 22% Net Gains

Actionable Conclusion Too: Sector Price Upsides and Top Trades Revealed

Top ten dogs powering each of these eight sector components were graphed below to show relative strengths by price upside estimates between November, 2012 and those projected to November, 2013. Historic aggregate single share price of the ten highest yielding stocks created the numbers for 2012. Projections based on aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2013 numbers for each index.

This graph of upside price potential show positive price gains for each sector ranging from 8.99% for the ten consumer goods dogs to 47.31% for the ten technology sector dogs.

Top Profit Generating Sector Dog Trades

The top profit generating dog trades one year from now were revealed by analysts mean target prices for each of eight sectors. The list below is summarized from Yahoo Finance data. The opportunities listed are based on each sector's best mean target price for 2013 determined by two to eight analysts.

Rhino Resource Partners from basic materials netted a 52.74% price gain based on a mean target price determined by 2 analysts. (Top ten basic materials dogs were reviewed a total of 12 analysts for an average of 1.2 analysts per stock.)

Pitney Bowes from consumer goods was projected to net a 49.98% price gain based on mean target price determined by 4 analysts. (Top ten consumer goods dogs were reviewed a total of 20 analysts for an average of 2 analysts per stock.)

Arlington Asset Investment Corporation from financials showed a 46.47% net gain based on a mean target price set by 3 analysts. (Top ten financials dogs were reviewed a total of 69 analysts for an average of 6.9 analysts per stock.)

Heska Corporation from healthcare was determined to net a 58.17% price gain based on a mean target price set by 3 analysts. (Top ten healthcare dogs were reviewed a total of 61 analysts for an average of 6.1 analysts per stock.)

James Hardie Industries from industrial goods was estimated to show a 19.73% net gain based on a mean target price set by 24 analysts. (Top ten industrial goods dogs were reviewed a total of 25 analysts for an average of 2.5 analysts per stock.)

Tsakos Energy Navigation from the services sector was projected to net a 122.72% net gain based on a mean target price set by 7 analysts. (Top ten services dogs were reviewed a total of 37 analysts for an average of 3.7 analysts per stock.)

Cellcom Israel from technology was set to net a 71.27% annual gain based on mean target pricing set by 3 analysts. (Top ten technology dogs were reviewed a total of 48 analysts for an average of 4.8 analysts per stock.)

Atlantic Power Corp from the utilities sector was seen to net 36.97% based on a mean target price set by 2 analysts. (Top ten utilities dogs were reviewed a total of 47 analysts for an average of 4.7 analysts per stock.)

All nine sectors and their component stocks will have ongoing stories to tell. These graphs, charts, and lists of companies will be updated again for publication periodically.

Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Disclosure: I am long T, VZ, INTC, JNJ, CVX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.