The "Dogs of the Index" is a once per year trading system triggered by yield. It can also be used as a screen 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 from nine collections of equities built by experts.
Relative strengths of nine stock indices were compared by (1) yield and (2) dividend vs. price gaps using projected annual dividends from $1000 invested in the 10 highest yielding stocks in each index. This article reported November results from 3x9 and 1X9+1 Sector indices, the Russell 1000, S&P 500, NYSE International 100, NASDAQ 100, Dow 30, S&P 500 Aristocrats, and JPMorgan Sovereigns indices as of December 5, 2012.
This effort was part an ongoing response to the question, "which dividend stocks were good, better, best, bad or ugly since October?"
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." Hence, this article graphically depicts the gyrations.
Dog Metrics Selected 10 in Each Index
Two key numbers determined the yields that ranked stocks in each index: (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.
Top 10 dogs for each index displayed their annual dividends from $1000 invested in the 10 highest yielding stocks in the index compared to the aggregate single share prices of the top 10 stocks therein created the data points for each of the past six months, shown in green for price and blue for dividends.
Previous posts ranked the subject indices by risk in the following order from most risk to least:
3x9 and 1x9+1 Sectors
The 3x9 Sectors Index is created by ranking the top three dogs from nine sectors by yield to get the 10 highest ranking from that pool of 27. Results for selected top yielding dogs from each of nine business sectors, along with the best yielding runner-up from any sector as the 10th perfectly diversify a top 10 sector index portfolio, named 1x9+1 Sectors Index.
For November, the top 10 dividend paying stocks in the 3x9 index represent five sectors: three from basic materials, Whiting USA Trust (WHX), Great Northern Iron Ore Properties (GNI), and SandRidge Mississippian Trust I (SDT); three from financial, Mesabi Trust (MSB), New York Mortgage Trust (NYMT), and Arlington Asset Investment Corporation (AI) ; one from services, Tsakos Energy Navigation (TNP); two from technology, Portugal Telecom SGPS (PT), and City Telecom (CTELF.PK); one utility, Just Energy Group (JE).
Nine top dogs and the top runner-up on the above chart make up the November 1x9+1 list: Whiting in basic materials; Mesabi Trust in financial; Great Northern, the basic materials runner-up; Tsakos for service; Portugal Telecom, technology; Just Energy, utilities; Pitney Bowes (PBI), consumer goods; James Hardie Industries SE (JHX), industrial goods; PDL BioPharma (PDLI), healthcare; Dow Chemical (DOW), conglomerates.
Since October, the 3x9 sector dividend from $1k invested in each of these top 10 stocks sank 4.7%, as their aggregate single share stock price jumped 78% under a very bullish trend. The 1x9+1 sector dogs also ran with the bulls after October, as their dividend was down 1.5% while their price was up 98.7%.
Russell 1000 Index Stocks
Russell Investments states that the Russell 1000 Index offers investors access to the extensive large-cap segment of the U.S. equity universe, representing approximately 90% of the U.S. market.
Six of the top 10 stocks in this index paying the big dividends through November were financial sector firms: American Capital Agency (AGNC) led the top three. Chimera Investment Corp. (CIM) and Annaly Capital Management Inc (NLY) immediately followed. One consumer goods firm, Pitney Bowes Inc., was next in fourth place. Hatteras Financial Corp (HTS), another financial firm, was fifth. Two technology firms captured the sixth and 10th slots, Windstream Corp (WIN), and Frontier Communications (FTR). One services firm, Donnelley R R & Sons Co.(RRD) was seventh. Then two more financial representatives completed the top 10, MFA Financial Inc, (MFA), and Ares Capital Corp (ARCC).
Since October, this index flashed bear market signals as dividends increased 6% from $1k invested in each of the top 10 stocks, while the aggregate single share price for those stocks dropped 5%. Russell Dog price came within $.04 of its lowest for 2012.
NYSE International 100 Stocks
The NYSE states, "The NYSE International100 Index tracks the largest 100 non-U.S. common stocks listed on the New York Stock Exchange. As of year-end 2004, the companies represented have a combined market capitalization (float-adjusted) of $4.3 trillion. Together they represent over one-quarter of the total market capitalization of all common stocks listed on the NYSE."
As of December 5, the top two stocks that showed the biggest dividend yields in this index were technology firms: top dog was France Telecom (FTE); Telef S.A. (TEF), second. Four basic materials firms were represented: Companhia Siderurgica (SID) in third; BP PLC (BP) in eighth; Total S.A. (TOT), in ninth; Royal Dutch Shell PLC B (RDS.B), 10th. Two financial companies placed fourth and seventh, Westpac Banking Corp. (WBK), and BCE Inc. (BCE). The lone utility, National Grid PLC (NGG), placed fifth. One healthcare firm in the top 10, GlaxoSmithKline PLC (GSK), was sixth. In all, six of nine sectors were represented in the NYSE International top 10 by yield.
Since October, the international dogs have continued on a bull path. Dividend dropped 4.5% as price bounded up 9%.
International dog index risk ranked by divergence of dividend from price has declined 68% since April.
S&P 500 Stocks
McGraw Hill, publisher of the S&P 500 Index states "Standard & Poor's strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions." The company states that the "index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities."
Five sectors placed top dogs in this index for November. Top dog Pitney Bowes Inc. was one of two consumer goods firms. The remaining consumer goods dog was Reynolds American Inc. (RAI) in 10th place. Three technology firms made the top 10: Windstream Corp , Frontier Communications, and CenturyLink Inc. (CTL). Two services firms were listed, Donnelley, R.R. & Sons in third place, and Best Buy Co. Inc. (BBY) in eighth. One basic materials firm was fourth, Cliffs Natural Resources (CLF). Two utilities, Exelon Corp. (EXC), and Pepco Holdings Inc. (POM) completed the S&P 500 top dogs.
Since October, this index has been very bearish, as the dividend from $1k invested in each of the top 10 stocks inclined 10%, while single share price for those stocks declined 13.7%.
NASDAQ 100 Stocks
NASDAQ states, "The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies."
Four sectors were represented in the top 10 NASDAQ dogs through November, per IndexARB.com data. Technology had the six firms at the top, showing high forward looking yields in this index. Vodafone (VOD) from this sector claimed the top spot. The other five technology firms in declining order were: Seagate Technology (STX); Microchip Technology (MCHP); Intel (INTC); CA Technologies (CA); and Garmin (GRMN). The remaining three NASDAQ high yield sectors for October were healthcare, represented by Warner Chilcott (WCRX); followed by two service firms, Paychex (PAYX) and Staples (SPLS); finally the lone consumer goods representative, PACCAR Inc. (PCAR), filled out the top 10.
NASDAQ 100 Index dogs showed mixed market messages since October, as the projected dividend total from $1k invested in each of the top 10 dogs increased 5.2%, while their aggregate total single share price also increased 12%.
S&P 500 Aristocrats Stocks
McGraw Hill, publisher of this index, states, "The S&P 500® Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years."
November Aristocrats featured six of nine business sectors in the top 10 by yield. One of three consumer goods firms led the pack. Pitney Bowes Inc. led; Leggett & Platt (LEG) was fourth; Kimberly-Clark (KMB) placed 10th for the consumer goods contingent. Remaining dogs in the top 10 represent five sectors: one technology, AT&T (T) in second place; two financials, HCP, Inc. (HCP) & Cincinnati Financial (CINF) in third and sixth place; one utility, (ED) placed fifth; one basic materials (NUE) was seventh; two service firms placed eighth and ninth, McDonald's Corp. (MCD), and Sysco Corporation (SYY).
Since October, S&P 500 Aristocrats resumed a bear path as dividend from $1k invested in each of the top 10 dogs popped 7%, while the aggregate single share price for those stocks dropped 8.4% for the period. S&P 500 Aristocrats went back the bear cave, but escaped an overbought condition.
Dow 30 Stocks
CME Group, publisher of this index, stated, "The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. indexes, such as the S&P 500 Index providing additional opportunities."
The November Dow dogs included just four of nine business sectors in the top 10 by yield. Four technology firms showed the biggest dividend yields, according to IndexArb.com: AT&T; Verizon (VZ); Intel Corp.; Hewlett-Packard (HPQ). These technology top dogs were followed by one basic materials firm, Dupont (DD), was listed fifth. Three healthcare firms ranked themselves in sixth to eighth place: Merck (MRK); Pfizer (PFE); and Johnson & Johnson (JNJ). The the lone service firm, McDonald's placed ninth. Finally, the last tech dog, Microsoft Corp. (MSFT) rounded out the top 10 Dow list.
Of all the indices in this article, the Dow is the most neutral in bullish or bearish price and dividend movement. Projected annual dividend from $1k invested in each of the top 10 increased 5% since January, while aggregate single share price also increased 4%. Since October, the Dow dogs followed a bear track, as dividends increased 3.6% while price dropped 1%.
JPMorgan New Sovereigns Stocks
Thomas Lee, an equity strategist with JPMorgan, July 22, 2011, published a note titled "Corporates are the New Sovereigns: 22 stocks to own around sovereign default." The Barron's article covering Lee's announcement defined a Sovereign as an entity, which can print money or tax at will. Lee's report listed 22 corporate stocks that show less risk of default than the sovereign U.S. government, based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by J.P. Morgan, and showing upside to their target prices.
The biggest yields for 10 November Sovereigns included firms from seven of nine business sectors. An industrial goods firm captured the top slot: Lockheed Martin Corp. (LMT), while another industrial, Raytheon Inc. (RTN) was fifth ceded. Two basic materials firms were next, ConocoPhillips (COP) second, and Freeport-McMoRan (FCX) in third place. Two healthcare firms placed, Merck in fourth, and Abbott Laboratories (ABT) slotted seventh. Two services firms placed sixth and eighth, Norfolk Southern Corp. (NSC), and United Parcel Service (UPS). One consumer goods firm placed ninth, Pepsico Inc. (PEP). Finally the lone technology firm, Texas Instruments (TXN) placed 10th to round out the top 10 November new sovereign dogs.
JPMorgan Sovereigns Index constituents showed as overbought throughout 2012, as projected dividend totals for $1k invested in the top 10 were graphed $200 more or less below their aggregate total single share price. These dogs followed a bear track since October, as dividends went up 7.7% while price slumped nearly 3%.
All Together Now
Each graph below shows periodic 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) by index. Grouped together the graphs display eight periods of comparative gyrations of the nine indices described.
Dog Teams Go for Dividend Dominance
The following graph shows annual dividends projected from $1000 invested in each of 10 stocks with the top yields in nine indices. The chart plotted projected dividend as of a specific purchase period since December/January. Generally, projected dividends increased in the indices when average stock price fell. However, yield projections were subject to corporate fiscal considerations, so dividend also plunged when times got tough.
Annual Dividends Forecast From $1k Invested In Each Of 10 Top Yielding Stocks In 9 Indices
Relative yield strengths differentiated the indices graphed. The JPMorgan Sovereigns showed the lowest dividend from $1000 invested in each of those 10 top stocks with a low trajectory up 1.4% since January.
The Dow and NASDAQ dividends behaved like a braided cord until April but thereafter, separated with the NASDAQ top 10 showing a higher aggregate dividend from $1000 invested in each of the 10 stocks. The Dow dividend is up 4.7% since January, while the NASDAQ 100 top 10 popped up 8.4% for the period. Aristocrats' dividends increased 6% since January.
S&P 500 projected dividends popped up 12% over that timeframe. NYSE International 100 dividends from $1000 invested in the top 10 stocks now show a 13.5% drop between January and November after spiking 23.7% in April.
Russell index dogs dropped 18.7% in projected dividend between January and April, but have steadied at a 9.6% drop as of November.
Projected dividends from top 10 1x9+1 sector dogs dropped 33.17% between January and July, now recovering to a mere 20% drop as of November; 3x9 sector dogs dividends dropped 28.16% between January and July, recovering to 16% for November.
Relative Risk For Dogs By Index
A reader request to "add relative financial data on the companies selected" for an early article comparing indices only by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any five or 10 Dogs of the Index stocks at any point during the year. This information continues to be reviewed as one step toward Robert Shiller's admonishment to "make conservative preparations for possible bad outcomes."
Divergence From Share Price Ranked Investor Risk By Index
The charts and accompanying graphs below show the November Divergence ranks of the nine indices for investment risk from high to low.
Actionable Conclusion: Analysts Forecast Dogs in 8 Indices To Post 12% to 55% Annual Net Gains
Charts below for each index show comparative net gains as of November 2012 and those projected to November 2013. Historic aggregate single share price of the 10 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 (including a -$20 broker fee) added to the projected dividends revealed the total net for each index. Since $10k is the initial investment, the percentage net gain is easy to calculate for each index.
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.
Sectors 1x9+1 Index Analysts See Near 55% Net Gains
Russell 1000 Index Analysts See Near 23% Net Gains
NYSE International 100 Index Analysts See Near 37% Net Gains
S&P 500 Index Analysts See Near 25% Net Gains
NASDAQ 100 Index Analysts See Over 18% Net Gains
S&P 500 Aristocrats Index Analysts See Near 12% Net Gains
DOW 30 Index Analysts See Over 12% Net Gains
JPM New Sovereigns Index Analysts See Over 13% Net Gains
Summary Of Index Price Upsides
Top 10 dogs for this index component list were graphed below to show relative strengths by price as of November 2012 and those projected to November 2013. Historic aggregate single share price of the 10 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 became a graph of upside price potential, since all the analyst estimates showed positive price gains for each sector, ranging from 6.56% for the 10 S&P 500 Aristocrat dogs to 20.95% for the 10 S&P 500 Index dogs.
Actionable Conclusion Two: Eight Top Profit Generating Dog Trades
The most likely profit generating dog trades one year from now were revealed by analysts' mean target pricing for each of eight indices determined by two to eight analysts*. The list below is summarized from Yahoo Finance and IndexArb.com data.
Companhia Sideurgica Nacional in the NYSE 100 International index was projected to have a 205% price gain based on a mean target price set by seven analysts.
Tsakos Energy Navigation's 108% price gain in the 1x9+1 Sectors index was determined by a mean target price set by seven analysts.
Warner Chilcott's 68% annual price gain in the NASDAQ 100 index was based on a mean target price set by 14* analysts.
Freeport-McMoRan revealed a 51% annual gain in the JPM Sovereigns index based on mean target pricing set by 17* analysts.
Cliffs Natural Resources' 47% price gain was tops in the S&P500 index as of next November based on a mean target price set by 16* analysts.
Donnelley R R & Sons Co.'s 44% price gain in the Russell 1000 index was based on a mean target price set by four analysts.
Pitney Bowes' 40% price gain in the S&P500 Aristocrats index next year was based on mean target pricing set by four analysts.
Microsoft Corp. showed 33% price gain in the Dow index next year based on a mean target price set by 24* analysts.
[*Note: A mean target price projection based on estimates compiled by more than eight or fewer than three analysts is deemed unreliable.]
These indices and their component stocks have ongoing stories to tell. Their graphs, charts, and lists of companies will be updated for publication periodically. Stay tuned.
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 are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.