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The Premise

A year ago, I published an article applying the "Dogs of the Dow" strategy to the Dividend Contenders, so it's only natural that I present a recap of that strategy. The original article can be found here, so I won't repeat the full text, but I said, in part, the following:

It seems only natural to apply this strategy to a listing of companies that have increased their dividends for many years. The logic is the same: The yields on depressed stocks will have been driven up, giving the investor a group of candidates that have not only rebound potential, but also a strong dividend that "pays them to wait.

Note that I am submitting separate articles about the "Dogs" of the Dividend Champions (25 or more years of increases) and Challengers (5-9 years), so please look for those, as well. As you may be aware, the Dow Jones keeps separate indices for Utilities and Transports, so its "Dogs" exclude those groups. (One exception is that Telecommunications providers - which many of us consider Utilities - are included in the Dow Jones Industrial Average, so I will also include them.) The DJIA also excludes Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), and foreign stocks (traded as American Depository Shares, or ADRs), among other classifications, so I will also exclude those from consideration.

Here, then, was the resulting table of selections:

Company

Ticker

No.

12/30

Div.

Payout

TTM

Name

Symbol

Yrs

Price

Yield

%Ratio

P/E

Vector Group Ltd.

(NYSE:VGR)

14

17.76

9.01

158.42

17.58

Northeast Indiana Bp.

(OTCQB:NIDB)

17

12.20

5.90

50.70

8.59

Avon Products Inc.

(NYSE:AVP)

22

17.47

5.27

54.12

10.28

Citizens Holding Co.

(NASDAQ:CIZN)

11

17.52

5.02

59.46

11.84

People's United Fin'l

(NASDAQ:PBCT)

19

12.85

4.90

116.67

23.80

First Keystone Corp.

(OTCQB:FKYS)

11

20.50

4.88

55.87

11.45

Juniata Valley Financial

(OTCQB:JUVF)

21

18.20

4.84

77.88

16.11

Meredith Corp.

(NYSE:MDP)

18

32.65

4.69

56.67

12.09

Norwood Financial

(NASDAQ:NWFL)

14

27.47

4.37

49.18

11.26

Auburn National Bp.

(NASDAQ:AUBN)

10

18.52

4.32

55.56

12.86

I went on to mention that several more banking firms had yields close to or above 4% and to say that they might also be worthy of additional study. I used the description of "Danger Dogs" to alert readers to the Payout Ratios above 100% and the "overdue" dividend increase - more than a year since the most recent increase - Citizens Holding, possible signs that caution was advised.

The Results are in...

and the following table shows how the 2012 Dividend Contender Dogs did:

Company

Ticker

12/30/11

12/31/12

Price

2012

Total $

Total %

Name

Symbol

Price

Price

Change

Divs.

Return

Return

Vector Group Ltd. *

(VGR)

16.11

14.87

-1.24

1.54

0.30

1.89

Northeast Indiana Bp.

(OTCQB:NIDB)

12.20

16.40

4.20

0.73

4.93

40.41

Avon Products Inc.

(AVP)

17.47

14.36

-3.11

0.75

-2.36

-13.51

Citizens Holding Co.

(CIZN)

17.52

19.45

1.93

0.88

2.81

16.04

People's United Fin'l

(PBCT)

12.85

12.09

-0.76

0.64

-0.12

-0.95

First Keystone Corp.

(OTCQB:FKYS)

20.50

24.30

3.80

1.01

4.81

23.46

Juniata Valley Financial

(OTCQB:JUVF)

18.20

18.25

0.05

0.88

0.93

5.11

Meredith Corp.

(MDP)

32.65

34.45

1.80

1.53

3.33

10.20

Norwood Financial

(NWFL)

27.47

29.75

2.28

1.20

3.48

12.67

Auburn National Bp.

(AUBN)

18.52

20.85

2.33

0.82

3.15

17.01

Average Return:

11.23

*Initial Price adjusted for 5% stock dividend

Conclusions

The 11.23% total return is easily above the 9.48% achieved for a Dow Dogs approach mentioned in the recent article by SA Contributor David Crosetti, which can be found here, and better than the familiar "10% over the past 75 years" that we've all read about for the overall market. Note that I did not construct a hypothetical portfolio, say, of $1,000 investments in each company. I believe that exercise would have resulted in the same portfolio return and demonstrated that the $10,000 investment would have ended with a value of $11,123, but slightly more if the dividends had been reinvested, instead of simply received.

In 2012, the S&P 500, which is often used as a benchmark, rose by 13.4% in price and had a total return of about 16% with reinvested dividends, so it would be all too easy to say that the Dogs approach was inferior. However, that view suffers from a short-term focus, which may be inappropriate for a long-term investor. The Dogs of the Dow approach, as demonstrated by Mr. Crosetti's article and the Dogs website, has posted superior returns over the past several decades and, as recently as 2011, it outperformed the S&P 500 by 16.3% to just 2.1%. (The "Small Dogs" did even better.) Further, it seems intuitive to expect underperformance in years when the market as a whole does better than its traditional 10% return and to expect outperformance in years when it does worse. That's the nature of the Dogs strategy, which is a "value" approach.

Speaking of the "Small Dogs" variation, the five lowest priced Dividend Contender Dogs averaged an 8.78% total return in 2012, held back most by the negative results for Avon, which eventually slashed its dividend. One final thought about comparing Dogs returns with those of the S&P 500: The former tends to offer a high degree of safety because of the positive element of dividends received, as well as lower volatility (and Beta), so investors can avoid the wilder ride and lower income stream that an index investor must endure. There's a lot to be said for the "Sleep well at night" [SWAN] element. I'll write more about the Dogs strategy in the coming days, when I spell out the composition of the 2013 Dividend Contender Dogs.

Be sure to check the accompanying articles on the "Dogs" of the Dividend Champions and Challengers for more ideas.

Source: 2012 Dividend Contender Dogs Review