This report series began in the fall of 2011 by applying dog dividend methodology to reveal possible buy opportunities in each of eight major market sectors as listed by Yahoo Finance: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities. The ninth conglomerate sector had too few members to report.
Dogs of the Index Metrics Selected Ten Top Basic Materials Stocks
Two key metrics determined the yields that ranked these sector dog stocks: (1) projected annual dividend; (2) stock price. 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 high yielding stocks whose prices increased (and whose dividend yields therefore decreased) could be sold off once a year to sweep gains and reinvest the 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."
Comparative Methods Used
First, the entire list of basic materials sector companies was sorted by yield as of January 4 using Ycharts.com to reveal the top fifty. Market performance of those selections was then reviewed using eight periods of historic projected annual dividend history from Yahoo Finance along with annual dividend projections adjusted for market realities. Then the list was reduced to the top thirty shown below.
Thereafter, this article assessed the relative strengths of the basic materials sector top ten dividend dogs as of January 4 closing prices vs. the Dogs of the Dow. Annual dividends from $1000 invested in the ten highest yielding stocks in the sector and index were compared to the aggregate single share prices of the top ten stocks in each.
Finally, to gauge future upside potential, a hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter one year mean target prices set by analysts multiplied by the number of shares supplemented the dividend amount minus a flat $20 broker fee to determine a net gain amount for the five stocks showing the most upside price potential into 2014. The number of analysts contributing to the mean target price estimate for each stock was noted. Three to nine analysts was considered optimal for a projected estimate.
Basic Materials Dividend Dogs
Six of the top ten basic materials stocks paying the biggest dividends as of January 4 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), another independent; Ferrellgas Partners (NYSE:FGP), a marketer; QR Energy (NYSE:QRE), an independent; Memorial Production Partners (NASDAQ:MEMP), another independent.
Just four of the top ten basic materials firms did not mention oil or gas in their industry description: Oxford Resource Partners (NYSE:OXF), a metal and minerals firm; Great Northern Iron Ore Properties (NYSE:GNI), a steel and iron concern; Rhino Resource Partners (NYSE:RNO), a nonmetallic mineral miner; Natural Resource Partners (NYSE:NRP) another metal and minerals firm.
Dividend vs. Price Results Compared to Dow Dogs
Below is a graph of the relative strengths of the top ten basic materials dividend sector stocks by yield as of market close 1/4/2013 compared to those of the Dow. Historic projected annual dividend history from $1000 invested in each of the ten highest yielding stocks and the total single share prices of those ten stocks created the data points shown in green for price and blue for dividends.
Actionable Conclusion: Basic Material Dogs Try Bear Escape
January's basic materials collection of dividend payers reversed a bearish course in price and dividends set since February 2012.
Aggregate dividend from $10k invested in each of the top ten stocks dropped at a rate of 14.6% since November while total single share price climbed 4.3%.
Meanwhile, the Dow index reversed its overbought divergence as aggregate single share prices fell 14.8% while dividends from $1k invested in the top ten dropped just 6%. Dow top ten dogs moved beyond the convergence shown since November to display 7.5% dividend divergence over price as of January 4.
Basic materials sector top ten dogs showed $935 or 237% more dividends (with equally bigger risk) at a $162 or 44% lower aggregate share price for the top ten dogs than those of the Dow as of January 4.
Actionable Conclusion Too:
Analysts See Over 53% Net Gain from These 10 Dogs Come 2014
Top ten dogs for the basic materials sector were graphed below to show relative strengths by dividend and price as of January 4, 2013 and those projected by analyst mean price target estimates to the same date in 2014.
Historic prices and actual dividends paid from $1000 invested in the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points for 2013. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance created the 2014 data points green for price and blue for dividends.
Yahoo projected a 23% lower dividend from $10K invested in this group while aggregate single share price for the ten was projected to increase by 18% in the coming year.
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.
Five probable profit generating trades revealed by Yahoo for 2014 were:
Whiting USA Trust I netting $2,811.74, based on estimates from one analyst;
Oxford Resource Partners netting $878.61 based on an estimate from one analyst;
QR Energy netting $301.41 based on estimates from eleven analysts;
Memorial Production Partners netting $282.04, based on estimates from five analysts;
Natural Resource Partners netting $422.45, based on estimates from four analysts.
The net gain in dividend and price was 53.4% on $10k invested as $1k each in all ten top basic materials dogs.
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.