Introduction
One of the most popular - albeit simplistic - approaches to stock screening is the well known "Dogs of the Dow" strategy that simply picks the 10 highest yielding stocks from the Dow Jones Industrial Average at the start of the year and holds them until the end of the year. Although it had already been around for decades, it was highlighted in the book Beating the Dow by Michael B. O'Higgins and John Downes in 1991 and even has its own web site at http://www.dogsofthedow.com/
The success of the Dow Dog strategy has varied in recent years, as its popularity has attracted more participants, but it has provided superior returns over the long term. There are many variations of the approach, such as a "Small Dogs" version that suggests owning just the five lowest-priced stocks from among the 10 high yielders. Naturally, attempts have been made to apply the "Dogs" strategy to other indices or groups of companies, and that brings us to this article.
Dividend Contender Dogs
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." Dividend Contenders have all recorded 10-24 straight years of dividend increases, so they have proven their willingness to pass profits along to shareholders. (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.) You can see last year's results in this recent article: https://seekingalpha.com/article/1097511-2012-dividend-contender-dogs-review
Fellow Seeking Alpha author Fredrik Arnold ( https://seekingalpha.com/author/fredrik-arnold/articles ) has been publishing articles about various "Dog" strategies for some time, including pieces on the Champions, Contenders, and Challengers (as well as the combined "CCC" listing). And during the past year or so, fellow SA Contributor Miz Magic DiviDogs ( seekingalpha.com/author/miz-magic-divido... ) has been developing a similar strategy for her "DGI Lite" portfolio. My own thinking varies somewhat from those authors' in that I would adhere more closely to the Dow Jones conventions in screening the listings.
As you may be aware, 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. This year, I'm adding an additional exclusion by skipping over any company that has not increased its dividend within the past year, or what Miz would call being "in the Big Red Doghouse." Because I'm following the Dow Dogs conventions, I'll call this the "Pure-Bred" Dogs.
So, without further ado, here are the 2013 Dogs of the Dividend Contenders:
Company | Ticker | No. | 12/31/12 | Div. | EPS% | TTM |
Name | Symbol | Yrs | Price | Yield | Payout | P/E |
Vector Group Ltd. | (VGR) | 15 | 14.87 | 10.76 | 640.00 | 59.48 |
Communications Sys. | (JCS) | 10 | 10.40 | 6.15 | 355.56 | 57.78 |
Best Buy Corp. | (BBY) | 10 | 11.85 | 5.74 | n/a | n/a |
People's United Financial | (PBCT) | 20 | 12.09 | 5.29 | 96.97 | 18.32 |
Lockheed Martin | (LMT) | 10 | 92.29 | 4.98 | 52.51 | 10.54 |
Northeast Indiana Banc | 18 | 16.40 | 4.63 | 35.02 | 7.56 | |
ConocoPhillips | (COP) | 12 | 57.99 | 4.55 | 47.48 | 10.43 |
Waste Management | (WM) | 10 | 33.74 | 4.33 | 78.92 | 18.24 |
Microchip Technology | (MCHP) | 11 | 32.59 | 4.32 | 136.70 | 31.64 |
First Keystone Corp. | 12 | 24.30 | 4.28 | 55.61 | 12.99 |
There are several changes from last year's Dogs, which achieved a total return of 11.23%: JCS, BBY, LMT, COP, WM, and MCHP replace Avon (AVP), Citizens Holding (OTCQX:CIZN), Juniata Financial (OTCQX:JUVF), Meredith Corp. (MDP), Norwood Financial (NWFL), and Auburn National (AUBN). The "small dogs" are the five lowest priced shares.
Having a Near-Dog Experience...
...were the "second 10" highest yielders, which were dominated by banking stocks, but only Norwood and Arrow Financial (AROW) had yields above 4%. Those may also be worthy of additional study.
Danger Dogs...
...is a good description for some of the companies in the listing above, thanks to their Price/Earnings ratios of 31 or higher and Payout Ratios above 90%, so caution is advised. (Best Buy had negative earnings.) All of these have "warts" of some kind. Such is the nature of depressed stocks.
Be sure to check the accompanying articles on the "Dogs" of the Dividend Champions and Challengers for more ideas.
Disclosure: I am long LMT, COP, WM. 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.
