A once per year trading system triggered by yield, "Dogs of the Index" can also be used as a screen 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 from nine collections of equities built by experts.
Relative strengths of nine stock indices were compared by (1) yield and (2) dividend vs price gaps using projected annual dividends from $1000 invested in the ten highest yielding stocks in each index. This article reported January results from 3x9 and 1X9+1 Sector indices, the Russell 1000, S&P 500, NYSE International 100, NASDAQ 100, Dow 30, S&P 500 Aristocrats, and JPMorgan Sovereigns indices as of January 4 to 23, 2012.
To conclude that analysis one "best of breed" stock was selected from each of the 3x9 and 1X9+1 sector indices. Since the sector composite indices are derived from the same sources, just one dog was selected to represent those two derivations.
This effort was part an ongoing response to the question, "which dividend stocks were good, better, best, bad or ugly since October?"
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." Hence this article graphically depicts the gyrations.
Dog Metrics Selected Ten in Each Index
Two key numbers determined the yields that ranked stocks in each index: (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.
Top ten dogs for each index displayed their annual dividends from $1000 invested in the ten highest yielding stocks in the index compared to the aggregate single share prices of the top ten stocks therein created the data points for each of the past six months shown in green for price and blue for dividends.
Previous posts ranked the subject indices by risk in the following order from most risk to least:
3x9 and 1x9+1 Sectors
The 3x9 Sectors Index is created by ranking the top three dogs from nine sectors by yield to get the ten highest ranking from that pool of twenty-seven. Results for selected top yielding dogs from each of nine business sectors along with the best yielding runner-up from any sector as the tenth perfectly diversify a top ten sector index portfolio, named 1x9+1 Sectors Index.
For January the top ten dividend paying stocks in the 3x9 index represent four sectors: three from services, TAL Education Group (NYSE:XRS), Diana Containerships (NASDAQ:DCIX), and Box Ships (NYSE:TEU); three from basic materials, Whiting USA Trust I (NYSE:WHX), Oxford Resource Partners (OXF), and Great Northern Iron Ore Properties (NYSE:GNI); three from financial, Two Harbors Investment (NYSE:TWO), Mesabi Trust (NYSE:MSB), and New York Mortgage Trust (NASDAQ:NYMT); finally, one from technology, Portugal Telecom SGPS (NYSE:PT).
Nine top dogs and top runner-up on the above chart make up the November 1x9+1 list: TAL Education Group in Services; Whiting in basic materials; Two Harbors Investment in financial; Diana Containerships, the services runner-up; Portugal Telecom, technology; Pitney Bowes (NYSE:PBI), consumer goods; Just Energy (NYSE:JE), utilities; PDL BioPharma (NASDAQ:PDLI), healthcare; Highway Holdings (NASDAQ:HIHO), industrial goods; United Technologies Corporation (NYSE:UTX), conglomerates.
Since September the 3x9 sector dividend from $1k invested in each of these top ten stocks sank 4.17% as their aggregate single share stock price jumped 69% in a very bullish trend. The 1x9+1 sector dogs also ran with the bull after August as their dividend was down 5% while their price was up 49%.
Russell 1000 Index Stocks
Russell Investments states that the Russell 1000 Index offers investors access to the extensive large-cap segment of the U.S. equity universe, representing approximately 90% of the U.S. market.
Six of the top ten stocks in this index paying the big dividends inJanuary were financial sector firms: American Capital Agency (NASDAQ:AGNC) led these. One consumer goods firm, Pitney Bowes Inc. (PBI), was next in second place. Financials, Chimera Investment Corp. (NYSE:CIM) and Annaly Capital Management Inc (NYSE:NLY), immediately followed in third and fourth place. One services firm, Donnelley R R & Sons Co.(NASDAQ:RRD) was fifth. A technology firm captured sixth place, Windstream Corp (NASDAQ:WIN). Then three more financial representatives took seventh, eighth, and tenth slots Hatteras Financial Corp (NYSE:HTS), MFA Financial Inc, (NYSE:MFA), and Ares Capital Corp (NASDAQ:ARCC). One basic materials firm, Southern Copper Corp, (NYSE:SCCO) in ninth place completed the top ten.
Since November this index reversed to show a bull market signal as dividend decreased 7.5% from $1k invested in each of the top ten stocks while the aggregate single share price for those stocks popped up 31%.
S&P 500 Stocks
McGraw Hill, publisher of the S&P 500 Index states "Standard & Poor's strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions." The company states that the "index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities".
Five of nine sectors placed top dogs in this index in January. Top dog Pitney Bowes Inc (PBI) was one of two consumer goods firms. The remaining consumer goods dog was Reynolds American Inc. (NYSE:RAI) in ninth place. One services firm was listed, Donnelley, R.R. & Sons (RRD) in second place. Three technology firms made up the remaining top five of the top ten: Windstream Corp (WIN), Frontier Communications (NASDAQ:FTR), and CenturyLink Inc. (NYSE:CTL). One basic materials firm was seventh, Cliffs Natural Resources (NYSE:CLF). Three utilities, Exelon Corp. (NYSE:EXC), in sixth, Pepco Holdings Inc. (NYSE:POM) in eighth and Just Energy (JE) in tenth completed the S&P 500 top dogs.
Since April this index has sent mixed signals as the dividend from $1k invested in each of the top ten stocks went up 12.5% while single share price for those stocks also went up 5%.
NYSE International 100 Stocks
The NYSE states, "The NYSE International100 Index tracks the largest 100 non-U.S. common stocks listed on the New York Stock Exchange. As of year-end 2004, the companies represented have a combined market capitalization (float-adjusted) of $4.3 trillion. Together they represent over one-quarter of the total market capitalization of all common stocks listed on the NYSE."
As of January 22, the top two stocks that showed the biggest dividend yields in this index were technology firms: top dog was France Telecom (FTE); VimpelCom Ltd. (NASDAQ:VIP), second. Two financial companies placed third and sixth, Westpac Banking Corp. (NYSE:WBK), and BCE Inc. (NYSE:BCE). The lone utility National Grid PLC (NYSE:NGG) placed fourth. One healthcare firm in the top ten, GlaxoSmithKline PLC (NYSE:GSK) was sixth. Four basic materials firms represented the bottom 40% of the top ten: BP PLC (NYSE:BP); Total S.A. (NYSE:TOT); Ecopetrol S.A. (NYSE:EC); Royal Dutch Shell PLC B (NYSE:RDS.B). In all six of nine sectors were represented in the NYSE International top ten by yield.
Since April the international dogs have charged ahead on a bull path. Dividend dropped 39% as price bounded up 107%.
Also international dog index risk ranked by divergence of dividend from price has declined 9x% since April.
NASDAQ 100 Stocks
NASDAQ states, "The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies."
Three sectors were represented in the top ten NASDAQ dogs into January per IndexARB.com data. Technology had seven firms in the top ten showing high forward looking yields in this index. Vodafone (NASDAQ:VOD) from this sector claimed the top spot. The other six technology firms in declining order were: Garmin (NASDAQ:GRMN); Intel (NASDAQ:INTC); Microchip Technology (NASDAQ:MCHP); Seagate Technology (NASDAQ:STX); CA Technologies (NASDAQ:CA); Microsoft (NASDAQ:MSFT). The remaining two NASDAQ high yield sectors for January were two service firms, Paychex (NASDAQ:PAYX), and Staples (NASDAQ:SPLS), followed by consumer goods representative, Mattel (NASDAQ:MAT) which filled out the top ten.
NASDAQ 100 Index dogs showed bear market signals since April as projected dividend total from $1000 invested in each of the top ten dogs increased 4% while their aggregate total single share price dropped 11%.
S&P 500 Aristocrats Stocks
McGraw Hill, publisher of this index, states, "The S&P 500® Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years."
January Aristocrats featured six of nine business sectors in the top ten by yield. One of four consumer goods firms led the pack. Pitney Bowes Inc. (PBI) led; Leggett & Platt (NYSE:LEG) was fifth; Kimberly-Clark (NYSE:KMB) placed eighth, and Clorox Co. (NYSE:CLX) came in tenth for the consumer goods contingent. Remaining dogs in the top ten represented five sectors: one technology, AT&T (NYSE:T) was in second place; one utility, (NYSE:ED) placed third; two financials, HCP, Inc. (NYSE:HCP), and Cincinnati Financial (NASDAQ:CINF), were in fourth and sixth place; one service firm placed seventh, Sysco Corporation (NYSE:SYY) one basic materials (NYSE:NUE) was seventh; Johnson & Johnson (NYSE:JNJ) rounded out the top ten Aristocrats in ninth place.
Since April, S&P 500 Aristocrats have charted a bullish path as dividend from $1k invested in each of the top ten dogs declined .35% while the aggregate single share price for those stocks popped up 18% for the period. S&P500 Aristocrats have now returned to an overbought condition with price exceeding dividends by about $10 or 2%.
Dow 30 Stocks
CME Group, publisher if this index, states, "The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. indexes, such as the S&P 500 Index providing additional opportunities."
The January Dow dogs included five of nine business sectors in the top ten by yield. Three technology firms showed the biggest dividend yields according to Yahoo: AT&T (T); Verizon (NYSE:VZ); Intel Corp. (INTC). Two healthcare firms ranked themselves in fourth and sixth place: Merck (NYSE:MRK), and Pfizer (NYSE:PFE). One basic materials firm, Dupont (NYSE:DD) was sandwiched by the health dogs and listed fifth. The lone industrial goods firm, General Electric (NYSE:GE) placed seventh. Two tech dogs, Hewlett-Packard (NYSE:HPQ), and Microsoft Corp. (MSFT) placed eight and nine. Finally, the lone services firm, McDonald's (NYSE:MCD) rounded out the top ten Dow list.
Of all the indices in this article, the Dow is the most neutral in bullish or bearish price and dividend movement. Projected annual dividend from $1k invested in each of the top ten decreased 2% since April, while aggregate single share price also decreased 18%. Unlike the Aristocrats. the Dow dogs escaped their overbought condition as aggregate single share price of the ten lagged projected annual dividend from $1k invested in each of the ten by $28 or 7.6%.
JPMorgan New Sovereigns Stocks
Thomas Lee, an equity strategist with J.P. Morgan, July 22, 2011, published a note titled "Corporates are the New Sovereigns: 22 stocks to own around sovereign default." The Barron's article covering Lee's announcement defined a Sovereign as an entity which can print money or tax at will. Lee's report listed 22 corporate stocks that show less risk of default than the sovereign U.S. government, based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by J.P. Morgan, and showing upside to their target prices at that time.
The biggest yields for ten January Sovereigns included firms from just four of nine business sectors. Two industrial goods firm captured two of five top slots: Lockheed Martin Corp. (NYSE:LMT), was top dog while, Raytheon Inc. (NYSE:RTN) was fifth seeded. Two basic materials firms took second and fourth, Conoco Phillips (NYSE:COP), and Freeport-McMoRan (NYSE:FCX). The lone healthcare firm, Merck (MRK) placed fourth. Two consumer goods firms placed sixth and ninth, Pepsico Inc. (NYSE:PEP), and Coca Cola Co. (NYSE:KO). Finally three services firms placed seventh, eighth, and tenth, Norfolk Southern Corp. (NYSE:NSC), United Parcel Service (NYSE:UPS) and CSX Corporation (NYSE:CSX) to round out the top ten January new sovereign dogs.
JPMorgan Sovereigns Index constituents showed as most overbought of these nine indices throughout 2012. Projected dividend totals for $1000 invested in the top ten were consistently graphed $200 more or less below their aggregate total single share price. These dogs have followed a bear track for the past year as dividend increased 2% while price slumped nearly 11%.
All Together Now
Each graph below shows periodic 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 price of one share of each of the ten stocks (green points) by index. Grouped together the graphs display eight periods of comparative gyrations for the nine indices described.
Dog Teams Display Dividend Dominance
The following graph shows annual dividends projected from $1000 invested in each of ten stocks with top yields in nine indices. The chart plotted projected dividend as of a specific purchase period since February, 2012. Generally, projected dividend increased in the indices when average stock price fell. However yield projections were subject to corporate fiscal considerations so dividend also plunged when times got tough.
Annual Dividends Forecast from $1k Invested in Each of 10 Top Yielding Stocks in 9 Indices
Relative yield strengths differentiated the indices graphed. The JPMorgan Sovereigns showed the lowest dividend from $1000 invested in each of those ten top stocks with a low trajectory up 2% since February.
The Dow and NASDAQ dividends behaved like a braided cord until April but thereafter separated with the NASDAQ top ten showing a higher aggregate dividend from $1000 invested in each of their ten stocks. The Dow dividend is now down 2.8% since February while the NASDAQ 100 top ten dividend was up 3% for the period. Aristocrats dividend increased 0.6% since February.
S&P 500 projected dividend was up 0.7% over that timeframe. NYSE International 100 dividends from $1000 invested in the top ten stocks showed the biggest 19% drop of all indices between February 2012 and January.
Russell index dogs dropped 2% in projected dividend since February.
Projected dividends from top ten 1x9+1 sector dogs dropped 12% over the past 12 months; 3x9 sector dog dividend dropped 8%.
Relative Risk For Dogs by Index
A reader request to "add relative financial data on the companies selected" for an early article comparing indices only 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 continues to be reviewed as one step toward Robert Shiller's admonishment to "make conservative preparations for possible bad outcomes."
Divergence from Share Price Ranked Investor Risk by Index
The charts and accompanying graphs below show the November Divergence ranks of the nine indices for investment risk from high to low.
Actionable Conclusion: Analysts Forecast Dogs in 8 Indices To Reckon 8.5% to near 50% Annual Net Gains
Charts below for each index show comparative net gains as of January, 2013 and those projected to January, 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.
Five dogs from each index were selected as sells based on highest net gain. The hypothetical sale of those stocks (including a -$20 broker fee) added to the projected dividends revealed the total net for each index. Since $10k is the initial investment, the percentage net gain is easy to calculate for each index.
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.
Sectors 1x9+1 Index Analysts See Near 50% Net Gains
Russell 1000 Index Analysts See Over 18% Net Gains
S&P 500 Index Analysts See Near 17% Net Gains
NYSE International 100 Index Analysts See Near 12% Net Gains
DOW 30 Index Analysts See Near 11% Net Gains
NASDAQ 100 Index Analysts See Over 10% Net Gains
S&P 500 Aristocrats Index Analysts See Near 9% Net Gains
JPM New Sovereigns Index Analysts See Over 8% Net Gains
Summary of Index Price Upsides
Top ten dogs for this index component list were graphed below to show relative strengths by price as of January 4-23, 2013 and those projected to January, 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 became a graph of upside price potential since all the analyst estimates showed positive price gains for each sector ranging from 2.58% for the ten S&P500 Aristocrat dogs to 19.91% for the ten 1x9+1 Sector Index dogs.
Actionable Conclusion Too: 8 Top Profit Potential Dog Trades Flash 16% to 69% Annual Gains
The most likely profit generating dog trades one year hence were revealed by analysts mean target pricing for each of eight indices determined by two to eight analysts*. The list below is summarized from Yahoo Finance and IndexArb.com data.
TAL Education Group's 69% price gain in the 1x9+1 Sectors index was determined by a mean target price set by 8 analysts.
Pitney Bowes' 48% price gain in the S&P500 Aristocrats index next year was based on mean target pricing set by 3 analysts.
Donnelley R R & Sons Co.'s 44% price gain in the S&P500 index was based on a mean target price set by 4 analysts.
American Capital Agency's 40% price gain was tops in the Russell 1000 Index as of next January was based on a mean target price set by 20* analysts.
France Telecom in the NYSE 100 International index was projected to have a 32% price gain based on a mean target price set by 1* analyst.
General Electric showed a near 19% price gain in the Dow index next year based on a mean target price set by 14* analysts.
Freeport-McMoRan revealed a 16% annual gain in the JPM Sovereigns index based on mean target pricing set by 14* analysts.
[*Note: A mean target price projection based on estimates compiled by more than eight or fewer than three analysts is deemed unreliable.]
These indices and their component stocks have ongoing stories to tell. Their graphs, charts, and lists of companies will be updated for publication periodically. Stay tuned.
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 DD, GE, INTC, JNJ, MCD, MSFT, PFE, T, VZ. 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.