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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 Challenger 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 Challengers have all recorded 5-9 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 Contenders (10-24 years), so please look for those, as well.) You can see last year's results in this recent article: http://seekingalpha.com/article/1097541-2012-dividend-challenger-dogs-retrospective

Fellow Seeking Alpha author Fredrik Arnold ( http://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 Challengers:

Company

Ticker

No.

12/31/12

Div.

EPS%

TTM

Name

Symbol

Yrs

Price

Yield

Payout

P/E

Hickory Tech Corp.

(HTCO)

5

9.73

5.96

123.40

20.70

Reynolds American Inc.

(RAI)

8

41.43

5.70

89.39

15.69

Lorillard Inc.

(LO)

5

116.67

5.31

74.25

13.97

Verizon Communications

(VZ)

8

43.27

4.76

192.52

40.44

Darden Restaurants

(DRI)

8

45.07

4.44

56.98

12.84

Intel Corp.

(INTC)

9

20.62

4.36

39.30

9.00

Philip Morris International

(PM)

5

83.64

4.07

68.00

16.73

Hasbro Inc.

(HAS)

9

35.90

4.01

55.17

13.75

Farmers and Merchants

(OTCQB:FMAO)

9

20.00

4.00

37.04

9.26

Williams Companies

(WMB)

9

32.74

3.97

122.64

30.89

There are wholesale changes from last year's Dogs, which achieved a total return of 15.23%. Only Reynolds and Verizon are repeat Dogs. Of last year's list, two - National Presto (NPK) and Cheviot Financial (CHEV) were deleted for dividend reductions; two - United Community Bancorp (UCBA) and American Greetings (AM-OLD) - for "frozen" dividends; two more - National CineMedia (NCMI) and Birner Dental (BDMS) - for "overdue" increases; and two companies - Lockheed Martin (LMT) and Waste Management (WM) - because they were promoted to Contender status. The "small dogs" (which returned 23.98% last year) have been replaced by HTCO, FMAO, INTC, WMB, and HAS, the five lowest priced shares.

Having a Near-Dog Experience...

...were Safeway Inc. (SWY), with a 3.87% yield, and a somewhat distant H.J. Heinz (HNZ), with a 3.57% yield. Those may also be worthy of additional study.

Danger Dogs...

...is an apt description for companies above that have Price/Earnings ratios of 20 or higher ir Payout Ratios above 100%, so caution is advised. 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 Contenders for more ideas.

Source: 'Pure-Bred' Dividend Challenger Dogs For 2013