The "Dogs of the Index" is a once per year trading system triggered by yield that is used by many investors 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 in a collection of equities built by experts.
This summary covers eight yahoo and ychart business sectors (in alphabetical order): basic materials; consumer goods; financials, healthcare; industrial goods; services; technology; utilities. Sector results were compared to the Dow industrials based on relative strengths of (1) yield and (2) dividend vs price gaps using projected annual dividends from $1000 invested in the ten highest yielding stocks in each sector as of January 4. Results for the Dow index provided a baseline.
Abstracting all eight sectors in one post delivers eight currently undervalued stocks (one per sector) deemed by a quorum of analysts as showing significant upside price potential in addition to substantial dividend yield.
This effort responded to the question, "which dividend stocks were good, better, best, bad, or ugly, in the new year?"
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." Thus this article graphically depicted the gyrations.
Dog Metrics Selected Ten in Each Sector
Two key metrics determined the yields that ranked these sector dog stocks: (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.
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 low yielding stocks whose prices increase (and whose dividend yields therefore decrease) could be sold off once each year to sweep gains and reinvest 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."
Ten dogs for each sector displayed their annual dividends from $1000 invested in those highest yielding stocks in the sector and index compared to the aggregate single share prices of those top ten stocks to produce the summary graphs shown below:
Basic Materials Dividend Dogs
Of the top ten basic materials stocks paying the biggest dividends as of January 4 six 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), an independent; Ferrellgas Partners (NYSE:FGP), a marketer; QR Energy (NYSE:QRE), an independent; Memorial Production Partners (NASDAQ:MEMP), an independent.
Just four of the top ten basic materials firms did not mention oil or gas in their industry description: Oxford Resource Partners (OXF), a metal and minerals firm; Great Northern Iron Ore Properties (NYSE:GNI), a steel and iron concern due to expire in 2015; Rhino Resource Partners (NYSE:RNO), a nonmetallic mineral miner; Natural Resource Partners (NYSE:NRP) another metal and minerals firm.
Consumer Goods Dividend Dogs
Top ten consumer goods stocks showing the biggest dividend yields as of January 4 represented eight industries. Tops was the only business equipment firm listed, Pitney Bowes (NYSE:PBI). Second dog, Vector (NYSE:VGR) was one of three from the cigarettes industry. Other top ten dogs in the same cigarettes industry group were Reynolds (NYSE:RAI), eighth, and Altria (NYSE:MO), ninth. The one rubber & plastics firm listed, Deswell Industries (NASDAQ:DSWL) was third. Textile-clothing firm, Crown Crafts (NASDAQ:CRWS), was fourth. One personal products industry firm, CCA Industries (NYSEMKT:CAW), placed fifth. One sporting goods firm, Escalade (NASDAQ:ESCA) was sixth by yield. The balance of the top ten were: auto parts firm, Douglas Dynamics (NYSE:PLOW) in seventh; food commodities firm, Cresud S.A.C.I.F. y A (NASDAQ:CRESY) in tenth.
Financial Dividend Dogs
Top ten financial sector dogs showing the biggest dividend yields after December represented six industries. Top financial sector stock, Two Harbors Investment (NYSE:TWO) was one of four residential REITs. Others in that industry were New York Mortgage Trust (NASDAQ:NYMT), in third; American Capital (NASDAQ:AGNC), fourth; Armour Residential REIT (NYSE:ARR), seventh. Mesabi Trust (NYSE:MSB), one of two diversified investments firms in the top ten, was second. Dominion Resources Black Warrior Trust, the other in diversified investments firm, was sixth. Arlington Asset Investment (NYSE:AI), an investment brokerage, was fifth. The remaining three industries were represented by Life Partners (NASDAQ:LPHI) doing insurance, eighth; American Capital Mortgage Investment (NASDAQ:MTGE), diversified REIT, ninth; California First National Bancorp (NASDAQ:CFNB), a regional bank, tenth.
Healthcare Dividend Dogs
Eight industries were represented by the ten healthcare sector stocks showing the biggest dividend yields as of January 4. Top healthcare sector stock PDL BioPharma (NASDAQ:PDLI) was one of two biotechnology firms in the top ten. Heska Corporation (NASDAQ:HSKA) was the other and took sixth place. Nordion in second place represented specialized health services. Psychemedics (NASDAQ:PMD) appeared third as a medical laboratories and research firm. PetMed Express (NASDAQ:PETS), in fourth represented drug delivery firms. GlaxoSmithKline (NYSE:GSK) in fifth position was one of four drug manufacturers. Merck (NYSE:MRK) in eighth and Bristol-Myers Squibb Company (NYSE:BMY) in ninth, were the other drug manufacturers - major firms. Warner Chilcott, a drug manufacturers - other firm, placed tenth. Advocat Inc. (AVCA), providing long-term care facilities took seventh and completed the top ten healthcare dogs.
Industrial Goods Dividend Dogs
Ten industrial goods sector stocks showing the biggest dividend yields January 4 represented seven industries. Top industrial goods sector stock, Highway Holdings (NASDAQ:HIHO) was a metal fabrication outfit. Veolia Environement (NYSE:VE) in second, was one of three waste management firms in the top ten. The others were Ecology and Environment (NASDAQ:EEI), in fourth place, and Waste Management (NYSE:WM) in fifth. Aerospace & defense products & services was represented by Lockheed Martin (NYSE:LMT) in third place, and TAT Technologies (NASDAQ:TATT) in seventh. Starrett L S in sixth makes small tools. Xinyuan Real Estate in eighth, does residential construction. The remaining two in the top ten represented one industry each: Servotronics Inc (NYSEMKT:SVT) in ninth, represented industrial electrical equipment, and Plum Creek Timber Company (NYSE:PCL), in tenth, represented wood production.
Services Dividend Dogs
The top ten services sector stocks showing the biggest dividend yields January 4 represented five industries. Top service stock by dividend yield was the lone education firm, TAL Education Group (NYSE:XRS). Six stocks in shipping the shipping industry captured slots two to seven: Diana Containerships (NASDAQ:DCIX); Box Ships (NYSE:TEU); Nordic American Tankers (NYSE:NAT); Star Bulk Carriers (NASDAQ:SBLK); Capital Product Partners (NASDAQ:CPLP); Navios Maritime Partners (NYSE:NMM). Publishers were represented in eighth place by Educational Development Corporation (NASDAQ:EDUC). Business services took the ninth slot represented by Collectors Universe (NASDAQ:CLCT). Aviation took tenth represented by Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB).
Technology Dividend Dogs
Top ten technology sector stocks showing the biggest dividend yields JAUARY 4 represented six industries. Top two technology sector stocks Portugal Telecom SGPS (NYSE:PT), and NTELOS Holdings Corp. (NASDAQ:NTLS) represented wireless technology. The lone telecom services - foreign firm. France Telecom (FTE) took third. MIND C.T.I in fourth provides information technology. Telecom services - domestic had four representatives: Windstream Corporation (NASDAQ:WIN) in fifth; Warwick Valley Telephone (WVT), sixth; Consolidated Communications (NASDAQ:CNSL) in eighth; Frontier Communications Corporation (NASDAQ:FTR) in ninth. Rimage Corporation (RIMG), a computer peripherals firm, was seventh. At number ten, RF Industries (NASDAQ:RFIL) represented diversified electronics firms.
Utility Dividend Dogs
The top ten utilities sector stocks showing the biggest dividend yields January 4 represented four industries: diversified; electric; gas; foreign. Top dog, Just Energy Group (NYSE:JE) was one of three diversified firms; TransAlta Corporation (NYSE:TAC) in seventh and Exelon Corporation in eighth place were the others. Five gas firms took positions two, three, five, six, and seven: Niska Gas Storage (NYSE:NKA); American Midstream Partners (NYSE:AMID); Suburban Propane Partners (NYSE:SPH); Amerigas Partners (NYSE:APU), and PAA Natural Gas Storage (NYSE:PNG). The lone Electric utilities representative was listed in fourth, Atlantic Power Corporation (NYSE:AT). One foreign utility, CPFL Energia (NYSE:CPL) was listed tenth.
Dow Industrial Dividend Dogs
Three of five technology firms led the Dow top ten showing the biggest dividend yields as of January 4, according to Yahoo finance: (1) AT&T (NYSE:T); (2) Verizon (NYSE:VZ); (3) Intel Corporation (NASDAQ:INTC); (8) Hewlett Packard (NYSE:HPQ); (9) Microsoft Corp. (NASDAQ:MSFT). One basic materials firms was included (5) Dupont (NYSE:DD). The rest of the Dow ten included two healthcare dogs: (4) Merck ; (6) Pfizer (NYSE:PFE). One industrial made the dog list, (7) General Electric (NYSE:GE). A services firm, (10) McDonalds (NYSE:MCD) completed the ten top Dow dogs.
All Together Now
Each graph below shows eight 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). Grouped together the graphs display comparative gyrations of eight sectors and the Dow index.
Sector Dogs Vie for Dividend Dominance
The following graph shows annual dividends projected from $1000 invested in each of ten stocks with the top yields in eight sectors compared to those of the Dow. The chart plotted projected yields as of eight specific purchase points since January. Projected yields increased in the sectors when average stock prices fell. When prices escalated yields dropped.
Relative yield strengths differentiated the sectors. The Dow baseline shows the lowest overall yield with a low flat trajectory since February 2012. Healthcare dividend yield was down 8.9% for the year; industrial goods yield slumped 15.5%; consumer goods yield popped up 1.9%; utilities yield flared up 22.56%; technology increased 10.33%; services sector also vectored up 13.58% by yield for the year; basic materials yield popped up 25.51%; financial yields were down 1.9%.
Annual Dividends Forecast from $1k Invested in each of 10 Top Yielding Stocks in 8 Sectors & the Dow
Relative Risk of Dogs by Sector Shown by Dividend vs. Price Divergence
A reader request to "add relative financial data on the companies selected" for a previous article comparing indices by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 5 or 10 Dogs of the Index stocks at any point during the year. This information will continue to be reviewed monthly as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."
Dogfight for Dividend Dominance Decided
To show risk the gap between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten highest yielding stocks in an index or sector is measured against total prices of one share of each of those ten stocks in that same index or sector. These eight representative market indices displayed their relative divergences of dividend vs. price in the following order:
The services sector maintained top risk status as of early January as it showed 1423.247% divergence of dividend projected from $1000 invested in each of it's top ten stocks from the aggregate single share price of those ten. Technology showed 1,248.65% divergence; financials diverged 936.15% January 4; the average gap for the eight sectors plus the Dow was 574.26%; basic materials showed a gap of 549.20% between dividend and price; consumer goods showed a 404.35% gap; utilities aggregate single share stock price diverged 310.57% from dividends projected for $1k invested in each of the ten; healthcare gapped 179.43%; industrial goods dividends diverged 99.15% from price; Dow industrial top ten dogs diverged 17.64%, recovering from an overbought condition i November.
Actionable Conclusion: Analysts Forecast Dogs in 8 Sectors To Show 22% to 60% Net Gains
Charts below for each sector show comparative net gains as of January 4, 2013 and those projected to January 4, 2014. Historic aggregate single share price of the ten highest yielding stocks created the numbers for 2013. Projections based on aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2014 numbers for each index.
Two to five dogs from each index were selected as sells based on highest net gain. The hypothetical sale of those stocks added to the projected dividends revealed the total net for each sector. Since $10k is the initial investment, the percentage net gain is easy to calculate for each.
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.
Basic Materials Analysts See Near 53% Net Gains
Consumer Goods Analysts See Over 48% Net Gains
Financial Sector Analysts See Near 30% Net Gains
Services Sector Analysts See Over 26% Net Gains
Utilities Sector Analysts See Near 22% Net Gains
Healthcare Sector Analysts See Over 19% Net Gains
Technology Analysts See Near 18.5% Net Gains
Industrial Goods Analysts See Near 15% Net Gains
Actionable Conclusion Too: Sector Price Upsides and Top Trades Revealed
Top ten dogs powering each of these eight sector components were graphed below to show relative strengths by price upside estimates between January 4, 2013 and those projected to January 4, 2014. Historic aggregate single share price of the ten highest yielding stocks created the numbers for 2013. Projections based on aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2014 numbers for each index.
This graph of upside price potential shows positive price gains for each sector ranging from 5.32% for the ten industrial goods dogs to 17.63% for the ten basic materials sector dogs.
Top Profit Generating Sector Dog Trades
The top profit generating dog trades one year from now were revealed by analysts mean target prices for each of eight sectors. The list below is summarized from Yahoo Finance data. The opportunities listed are based on each sector's best mean target price for 2014 determined by two to eight analysts.
Natural Resource Partners from basic materials netted a 42.24% price gain based on a mean target price determined by 4 analysts. (Top ten basic materials dogs were reviewed a total of 33 analysts for an average of 3.3 analysts per stock.)
Pitney Bowes from consumer goods was projected to net a 43.52% price gain based on mean target price determined by 3 analysts. (Top ten consumer goods dogs were reviewed a total of 30 analysts for an average of 3 analysts per stock.)
Arlington Asset Investment Corporation from financials showed a 27.65% net gain based on a mean target price set by 4 analysts. (Top ten financials dogs were reviewed a total of 50 analysts for an average of 5 analysts per stock.)
Warner Chilcott from healthcare was determined to net a 53.52% price gain based on a mean target price set by 12 analysts. (Top ten healthcare dogs were reviewed a total of 65 analysts for an average of 6.5 analysts per stock.)
Just two companies, Ecology and Environment, and Xinyuan Real Estate, from industrial goods were estimated to show net gains based on a mean target price set by 1 analyst each. This is too little evidence to recommend any industrial goods stocks based on analyst estimate. (Top ten industrial goods dogs were reviewed a total of 31 analysts for an average of 3.1 analysts per stock.)
TAL Education Group from the services sector was projected to net a 68.67% net gain based on a mean target price set by 8 analysts. (Top ten services dogs were reviewed a total of 45 analysts for an average of 4.5 analysts per stock.)
NTELOS from technology was set to net a 44.61% annual gain based on mean target pricing set by 4 analysts. (Top ten techology dogs were reviewed a total of 35 analysts for an average of 3.5 analysts per stock.)
American Midstream Partners from the utilities sector was seen to net 42.17% for the next year based on a mean target price set by 3 analysts. (Top ten utilities dogs were reviewed a total of 56 analysts for an average of 5.6 analysts per stock.)
All nine sectors and their component stocks will have ongoing stories to tell. These graphs, charts, and lists of companies will be updated again for publication periodically.
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 where 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.