Top 10 March Basic Materials Dogs Fetch 16% To 26% Gains

by: Fredrik Arnold

This article reported tantalizing takes from basic materials sector stocks tracked down using dividend dog methodology. Recently Investor Glossary, an online investor primer, offered up this description of dividend dog methodology: "The Dow dividend theory is a popular but simple investing strategy. There are several variations of the Dow dividend theory, but put simply, you find the 10 stocks of the 30-stock Dow Jones Industrial Average with the highest yield (dividend / price) and invest equally in each. The Dow dividend theory also requires that you repeat this process once a year. The logic underlying the Dow dividend theory is that stocks with the highest yields have recently been the worst performers. (That's why the Dow dividend theory is also known as the Dogs of the Dow.) However, all the stocks in the Dow dividend theory universe are blue chips. In other words, a stock bought under the Dow dividend theory is high quality; the low stock price merely reflects that the stock (or its sector) is temporarily out of favor. But prices of even the blue chips of the Dow dividend theory can fluctuate substantially during the year. Thus the Dow dividend theory lets you continually rotate your portfolio so it has high-quality stocks with excellent potential for price appreciation."

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.

Dog Metrics Sniffed Out Top Basic Materials Stocks

Two key metrics determined the yields that ranked the sector dog stocks: (1) projected annual dividend; (2) stock price. 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 the Dow index to trade. They waited one year for 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).

Basic Materials Dividend Dogs

Eight of the top ten basic materials stocks paying top dividend yields as of March 15 represented oil and/or gas industries: Whiting USA Trust I (NYSE:WHX), a driller whose leases expire in 2015 was tops; BP Prudhoe Bay Royalty Trust (NYSE:BPT), a marketer was second; Ferrellgas Partners LP (NYSE:FGP), a marketer was third; MV Oil Trust Unit (NYSE:MVO), a driller, was fourth; BreitBurn Energy Partners LP (BBEP), a driller, was seventh; Penn West Corp (NYSE:PWE) a driller, was eighth; Seadrill Limited (NYSE:SDRL) a driller, was ninth; Martin Midstream Partners (NASDAQ:MMLP), a pipeline firm, was tenth.

Just two of the top ten basic materials firms did not mention oil or gas in their industry description: Great Northern Iron Ore Properties (NYSE:GNI), a steel and iron concern whose lease also expires in 2015, took second place on the list; Natural Resource Partners (NYSE:NRP), an industrial metals and minerals firm, was sixth.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten basic materials dogs by yield as of market close 3/15/2013 compared to those of the Dow. Historic projected annual dividend history from $1000 invested in each of the ten highest yielding stocks and the total single share prices of those ten stocks created the data points shown in green for price and blue for dividends.

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Actionable Conclusion: Basic Material Dogs Pushed Dividend to New High while Dow went Bullish

March's basic material collection of dividend payers reversed a bullish course set between November and February. Aggregate dividend from $10k invested in each of the top ten stocks jumped at a rate of 20.3% since February while total single share price dropped 4% in that period. The market signal became bearish as aggregate share price sagged while dividend from $1k invested in each stock popped up in the period.

The Dow went the opposite direction as price popped up 9.2% as dividend sank 3.1%. The Dow shows an overbought condition by 24% as aggregated single share price exceeded dividend from $1k in vested in each stock by $92.

Since sector dogs are not the blue chip high quality equivalents of the Dow list, an additional gauge of upside potential was added to the simple high yield metric used to sniff out bargains.

Wizards of Wall Street Weighed In

One year mean target price set by analysts multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2014 out of 20 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts was considered optimal for a valid mean target price estimate.

Actionable Conclusion Too: Analysts See 17% Net Gain from Top 20 Dogs Come 2014

Top twenty dogs for the basic materials sector were graphed below to show relative strengths by dividend and price as of March 15, 2013 and those projected by analyst mean price target estimates to the same date in 2014.

A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock upsides to 2014.

Historic prices and actual dividends paid from $1000 invested in the ten highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 2 created the data points for 2013. Projections based on estimated increases in dividend amounts from $1000 invested in the twenty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 2 created the 2014 data points green for price and blue for dividends.

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Yahoo projected a 4.4% lower dividend from $10K invested in this group while aggregate single share price was projected to increase by 5.5% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock was noted in the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied.

Ten probable profit generating trades revealed by Yahoo for 2014 were:

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Penn West Petroleum Ltd. (PWE) netting $263.75, based on estimates from six analysts;

Natural Resource Partners (NRP) netting $235.07 based on an estimate from four analysts;

Legacy Reserves LP (NASDAQ:LGCY) netting $229.43, based on estimates from twelve analysts.

Pengrowth Energy (NYSE:PGH) netting $209.66 based on estimates from six analysts.

Seadrill Limited (SDRL) netting $206.98, based on estimates from twelve analysts;

BreitBurn Energy Partners LP (BBEP) netting $205.61 based on estimates from thirteen analysts;

Linn Energy, LLC (LINE) netting $204.04, based on estimates from fifteen analysts.

Vanguard Natural Resources (NYSE:VNR) netting $179.02 based on estimates from twelve analysts.

Enerplus Corporation (NYSE:ERF) netting $179.02 based on estimates from seven analysts.

Enbridge Energy Partners LP (NYSE:EEP) netting $158.11, based on estimates from fifteen analysts.

The average net gain in dividend and price was 20.61% on $1k invested in each of these ten dogs.

These were suggested only as decent starting points for your basic materials dividend stock purchase research process. These were not recommendations.

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 ERF, PGH, DD, GE, INTC, JNJ, 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.