This report series started 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.
The "Dogs of the Index," a once per year trading system triggered by yield, is used by many investors to determine the best bargains in 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.
Sector results based on yahoo finance dividend yield screening 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 February 5. Results from 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, after January?"
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 those gyrations.
Dog Metrics Selected 10 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 10 stocks to produce the summary graphs shown below:
Basic Materials Dividend Dogs
Of the top 10 basic materials stocks paying the biggest dividends as of February 5, according to yahoo, nine represented oil and/or gas industries: Whiting USA Trust I (NYSE:WHX), a driller expiring in 2015; MV Oil Trust Unit (NYSE:MVO), another driller; Martin Midstream Partners (NASDAQ:MMLP), a pipeline firm; Seadrill Limited (NYSE:SDRL), another driller; Calumet Specialty (NASDAQ:CLMT), a marketer; Energy Transfer Partners (NYSE:ETP), another pipeline; Linn Energy, LLC (NASDAQ:LINE), an independent; Enbridge Energy (NYSE:EEP), a pipeline; Cheniere Energy Partners (NYSEMKT:CQP), another pipeline.
The lone non-O&G name on the Yahoo basic materials sector top stocks by yield screen was Great Northern Iron (NYSE:GNI) another trust expiring in 2015. This one is in the steel and iron industry.
Consumer Goods Dividend Dogs
Top 10 consumer goods stocks showing the biggest dividend yields per the Yahoo screen as of February 5 represented seven industries. Tops was the only business equipment firm listed, Pitney Bowes (NYSE:PBI). Second dog, Vector (NYSE:VGR) was one of four from the cigarettes industry. Other top 10 dogs in the same cigarettes industry group were Reynolds (NYSE:RAI), fourth, Lorillard, Inc (NYSE:LO) fifth, and Altria (NYSE:MO), sixth. The one personal products firm listed, CCA Industries, Inc.(NYSEMKT:CAW) was third. Furniture firm, Leggett & Platt, Inc. (NYSE:LEG), was seventh. One tobacco products firm, Universal Corporation (NYSE:UVV) was eighth by yield. The balance of the top 10 were: packaged goods firm, B&G Foods, Inc. (NYSE:BGS) in ninth; apparel firm, Cherokee Inc. (NASDAQ:CHKE) in tenth.
Financial Dividend Dogs
Top 10 financial sector dogs showing the biggest dividend yields by Yahoo Finance's screen after January represented four industries. Top financial sector stock, Two Harbors Investment (NYSE:TWO) was one of four residential REITs. Others in that industry were American Capital (NASDAQ:AGNC), in second, CYS Investments (NYSE:CYS), third, and Hatteras Financial (NYSE:HTS) in eighth. Annaly Capital Management (NYSE:NLY), one of three diversified REITs in the top ten, was fourth. The other diversified REITs were Chimera Investment (NYSE:CIM), in sixth, and Capstead Mortgage (NYSE:CMO) in ninth. Invesco Mortgage (NYSE:IVR), a mortgage investment firm, was fifth. The remaining asset management industry was represented by Prospect Capital (NASDAQ:PSEC), seventh, and BlackRock Kelso Corp. (NASDAQ:BKCC), in tenth position.
Healthcare Dividend Dogs
Four industries were represented by the 10 healthcare sector stocks showing the biggest dividend yields as of February 5, by Yahoo Finance. Top healthcare sector stock Daxor Corporation (NYSEMKT:DXR) was the only firm medical instruments and supplies firm in the top ten. GlaxoSmithKline (NYSE:GSK) in second position was one of seven drug manufacturers, major on this list. Others were Merck (NYSE:MRK) in fourth, Bristol-Myers Squibb Company (NYSE:BMY) in fifth, Novartis AG (NYSE:NVS) in sixth, Eli Lilly and Company (NYSE:LLY) in seventh, Sanofi American (NYSE:SNY) in eighth, and Pfizer, Inc. (NYSE:PFE), in tenth. PetMed Express (NASDAQ:PETS), in third represented drug delivery firms. Meridian Bioscience (NASDAQ:VIVO) providing diagnostic substances took ninth and completed the top 10 healthcare dogs.
Industrial Goods Dividend Dogs
Ten industrial goods sector stocks showing the biggest Yahoo screened dividend yields February 5 represented seven industries. Top industrial goods sector stock, Veolia Environnment (NYSE:VE), was one of three waste management firms in the top ten. The others were Waste Management (NYSE:WM) in second, and US Ecology, Inc. (NASDAQ:ECOL), in ninth place. Aerospace & defense-major firms took third and fifth slots: Raytheon Company (NYSE:RTN), and Northrop Grumman (NYSE:NOC). Aerospace & defense products & services was represented by Sturm, Ruger & Co (NYSE:RGR) in tenth place. CompX International (NYSEMKT:CIX) in fourth makes machine tools. Diversified machinery was represented by two firms in the top 10: General Electric (NYSE:GE) in sixth, and Hillenbrand Inc (NYSE:HI) in eighth place. The remaining firm in the top 10 represented industrial electrical equipment: LSI Industries Inc. (NASDAQ:LSI) in seventh place.
Services Dividend Dogs
The top 10 services sector stocks showing the biggest dividend yields February 4, per Yahoo represented five industries. Top service stock by dividend yield was one of six stocks representing the shipping industry: Navios Maritime Partners (NYSE:NMM). Other shippers were Capital Product Partners (NASDAQ:CPLP) in second place, Knightsbridge Tankers (VLCCF) in fourth, Ship Finance International (NYSE:SFL) in sixth, Teekay Offshore Partners (NYSE:TOO) in eighth, and Nordic American Tankers (NYSE:NAT) in ninth. Business services took the third slot represented by R.R. Donnelley & Sons (NASDAQ:RRD). StoneMor Partners (NYSE:STON) represented personal services in fifth place. Compass Diversified Holdings (NYSE:CODI) represented outsourcing services in seventh position. Finally, basic materials wholesaling took tenth represented by Global Partners LP (NYSE:GLP) to complete the services sector top 10 dogs.
Technology Dividend Dogs
Top 10 technology sector stocks from Yahoo Finance screening showing the biggest dividend yields February 5, represented five industries. Top two technology sector stock was the lone telecom services - foreign firm. France Telecom SA (FTE). NTELOS Holdings Corp. (NASDAQ:NTLS) in second represented wireless technology. Telecom services - domestic had six representatives: Windstream Corporation (NASDAQ:WIN) in third; Consolidated Communications Holdings (NASDAQ:CNSL) in fourth; Frontier Communications Corporation (NASDAQ:FTR) in fifth; CenturyLink, Inc. (NYSE:CTL) in seventh; BCE, Inc. (NYSE:BCE) in eighth; AT&T Inc. (NYSE:T) in ninth. In between domestic telecom group, Magic Software Enterprises (NASDAQ:MGIC), an application software firm, was sixth. At number 10, Garmin Ltd. (NASDAQ:GRMN) represented scientific & technical instrument firms.
Utility Dividend Dogs
The top 10 utilities sector stocks showing the biggest dividend yields February 5, by Yahoo represented four industries: electric; gas; diversified; foreign. Top dog, Atlantic Power Corporation (NYSE:AT) was one of three electric firms listed. The other electrics were in ninth and tenth places, FirstEnergy Corporation (NYSE:FE), and PEPCO Holdings Inc. (NYSE:POM). Four gas firms took positions two, three, seven, and eight: Suburban Propane Partners (NYSE:SPH); Amerigas Partners (NYSE:APU); Inergy, L.P. (NYSE:NRG); National Grid PLC (NYSE:NGG). Two diversified utilities were in fourth and fifth places, TransAlta Corporation (NYSE:TAC), and Exelon Corporation (NYSE:EXC). One foreign utility, CPFL Energia (NYSE:CPL) was listed sixth.
Dow Industrial Dividend Dogs
Three of four technology firms led the Dow top 10 showing the biggest dividend yields as of February 1, according to indexarb.com: (1) AT&T (T); (2) Verizon (NYSE:VZ); (3) Intel Corporation (NASDAQ:INTC); (9) Microsoft Corp. (NASDAQ:MSFT). Three healthcare dogs placed thus: (4) Merck (MRK); (6) Pfizer (PFE); (8) Johnson & Johnson (NYSE:JNJ). One basic materials firm was included (5) Dupont (NYSE:DD). The rest of the Dow 10 included one industrial firm, (7) General Electric (GE), and services firm, (10) McDonald's (NYSE:MCD), which completed the 10 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 as of February.
Note all the graphs below showed increased price and decreased dividend between the De/Ja and Fe points. This was caused by the authors jump to Yahoo Finance screens to supply the base list of stocks for each sector, which was formally gathered from YCharts. This change was prompted after YCharts migrated to an 11 sector list (basic materials, communication services, consumer cyclical, consumer defensive, energy, financial services, healthcare, industrials, services, real estate, technology, and utilities) that no longer conformed to the Yahoo nine sector classes listed previously. For further discussion about this change see this recent article.
Sector Dogs Vie for Dividend Dominance
The following graph shows annual dividends projected from $1000 invested in each of 10 stocks with the top yields in eight sectors compared to those of the Dow according to Yahoo Finance screens. The chart plotted projected yields as of eight purchase points since January. Generally, projected yields increased in the sectors when average stock prices fell. When prices escalated yields dropped. (See Note above regarding this months exceptional drop in dividend and jump in price.)
Relative yield strengths differentiated the sectors. The Dow baseline once showed the lowest overall yield with a low flat trajectory since March 2012. Most recently, industrial goods yield slumped to fall below the latest Dow point. Healthcare dividend yield was down 33% for the year; consumer goods yield dropped up 16%; utilities yield fell 17%; technology decreased 18%; services sector also vectored down 12% by yield for the year; basic materials yield was up 3%; financial yields were down 23%.
Annual Dividends Forecast from $1k Invested in each of 10 Top Yielding Stocks in 8 Sectors & the Dow
Relative Risk of Dogs by Sector Revealed 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. This information will continue to be reviewed periodically as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."
Dogfight for Dividend Dominance Detected
To show risk, the gap between the annual projected dividend (resulting from $10,000 invested as $1,000 each in the top ten highest yielding stocks) was compared to the aggregate price of one share each of those ten stocks in that same index or sector. These eight representative market indices displayed their relative divergence of dividend vs. price in the following order:
The services sector dropped out of top risk status this month as it fell from 1423.247% in January to 483.71% in February of dividend divergence projected from $1000 invested in each of it's top 10 stocks from the aggregate single share price of those ten. Financial was tops with 681.39 % divergence. Technology showed 291.06% divergence; basic materials showed a gap of 232.06% between dividend and price; the average gap for the eight sectors plus the Dow was 213.82% in February; utilities aggregate single share stock price diverged 127.79% from dividends projected for $1k invested in each of the 10; consumer goods showed a 91.97% gap; industrial goods dividends diverged 15.53% from price; healthcare gapped 11.94%; Dow industrial top ten dogs dividends diverged (11.11%), as they reverted an overbought condition.
Actionable Conclusion: Analysts Forecast Dogs in 8 Sectors To Show 7% to 17% Net Gains
Charts below for each sector show comparative net gains as of February 5, 2013 and those projected to February 5, 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.
Services Sector Analysts See Over 17% Net Gains
Industrial Goods Analysts See Over 17% Net Gains
Basic Materials Analysts See Over 16.5% Net Gains
Utilities Sector Analysts See Over 16% Net Gains
Financial Sector Analysts See Over 14.6% Net Gains
Technology Analysts See Over 13% Net Gains
Consumer Goods Analysts See Near 13% Net Gains
Healthcare Sector Analysts See Over 7.7% Net Gains
Actionable Conclusion Too: Sector Price Upsides and Top Trades Revealed
Top 10 dogs powering each of these eight sector components were graphed below to show relative strengths by price upside estimates between February 5, 2013, and those projected to February 5, 2014. Historic aggregate single share price of the 10 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 4.54% for the ten financial sector dogs to 11.05% 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 twenty analysts.
R.R. Donnelley & Sons from the services sector was projected to net a 51.65% net gain based on a mean target price set by 4 analysts. (Top 10 services dogs were reviewed by a total of 52 analysts for an average of 5.2 analysts per stock.)
LSI Industries Inc. from industrial goods was estimated to show a net price gain of 40.03% based on a mean target price set by 2 analysts. (Top 10 industrial goods dogs were reviewed a total of 62 analysts for an average of 6.2 analysts per stock.)
Pitney Bowes from consumer goods was projected to net a 25.56% price gain based on mean target price determined by 3 analysts. (Top 10 consumer goods dogs were reviewed a total of 42 analysts for an average of 4.2 analysts per stock.)
Atlantic Power Co. from the utilities sector was seen to net 24.05% for the next year based on a mean target price set by 4 analysts. (Top 10 utilities dogs were reviewed a total of 76 analysts for an average of 7.6 analysts per stock.)
NTELOS from technology was set to net a 22.45% annual gain based on mean target pricing set by 4 analysts. (Top 10 technology dogs were reviewed a total of 92 analysts for an average of 9.2 analysts per stock.)
American Capital Agency from financials showed a 21.83% net gain based on a mean target price set by 20 analysts. (Top 10 financials dogs were reviewed a total of 98 analysts for an average of 9.8 analysts per stock.)
Seadrill Limited from basic materials netted a 19.45% price gain based on a mean target price determined by 14 analysts. (Top 10 basic materials dogs were reviewed a total of 65 analysts for an average of 6.5 analysts per stock.)
Merck & Company from healthcare was determined to net a 19.39% price gain based on a mean target price set by 15 analysts. (Top 10 healthcare dogs were reviewed a total of 87 analysts for an average of 8.7 analysts per stock.)
These Yahoo sectors and their component stocks 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 AT, 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.