10 Ace Energy Dogs Scout 19% To 39% Gains For March

by: Fredrik Arnold

Seeking Alpha reader requests prompted this Morningstar/YChart (M/Y) report series that began last month. It complemented my reports of possible dividend yield based buy opportunities from eight major market sectors as listed by Yahoo Finance which I've posted since the fall of 2011.

So, responding to both the Seeking Alpha reader request and Ycharts.com migration to an eleven sector list, this report provided three actionable conclusions about ace dogs of the Morningstar/YCharts (M/Y) sectors: basic materials; communication services; consumer cyclical; consumer defensive; energy; financial services; healthcare; industrials; real estate; technology; utilities. These sectors were all subjected to screening based on a once per year trading system triggered by yield augmented with one year mean target price estimates from broker analysts.

An online investor primer, Investor Glossary, recently offered this brief description of dividend dog methodology: "...[I]nvented to find the 10 stocks of the 30-stock Dow Jones Industrial Average with the highest yield (dividend / price) and invest equally in each, [t]he Dow dividend theory also requires that you repeat this process once a year.

Below, the Arnold M/Y Energy Sector Selections for March were disclosed.

Dog Metrics Divulged Top Energy Stocks

Top 10 energy stock aces showing the biggest dividend yields as of March 22, according to Y/M screens represented four business types in the oil and gas industry. Whiting USA Trust I (NYSE:WHX), a driller whose leases expire in 2015 was tops; SandRidge Mississippian Trust I (NYSE:SDT) one of five exploration and production firms was second; SandRidge Permian Trust (NYSE:PER), another E&P was second dog. BP Prudhoe Bay Royalty Trust (NYSE:BPT), one of two refiner and marketers was third. The remaining three of five E&Ps placed fifth, sixth and seventh: QR Energy (NYSE:QRE), LRR Energy (NYSE:LRE), Memorial Production Partners (NASDAQ:MEMP). Ferrellgas Partners (NYSE:FGP) the second refiner and marketer on this list, was eighth. MV Oil Trust (NYSE:MVO), a third driller was ninth. Finally, North European Oil Royalty Trust (NYSE:NRT), an energy equipment firm, was the 10th dog by yield.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top 10 M/Y energy dogs by yield as of market close 3/22/2013 compared with those of the Dow. Historic projected annual dividend history from $1000 invested in each of the 10 highest-yielding stocks and the total single share prices of those 10 stocks created the data points shown in green for price and blue for dividend.

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Actionable Conclusion: M/Y Energy Dogs Showed Mixed Signal as Dow Went Bullish

March's M/Y energy collection of dividend payers continued a (bullish) upward price course set since November, 2012 as price hopped up 5.5% the past month. Aggregate dividend from $10k invested in each of those top 10 dogs also (bearishly) jumped 16.4% last month.

The Dow, meanwhile went totally bullish as price popped up 9.2% while dividend sank 3.1% last month. The Dow shows an overbought condition by 24% as aggregated single share price exceeded dividend from $1k invested 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.

Wall Street Weighed In

One year mean target price set by brokerage analysts multiplied by the number of shares in a $1k investment were used to compare 10 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 Two: Analysts Forecast 11.3% Net Gain from Top 20 M/Y Energy Dogs Come 2014

Top 20 dogs for the M/Y energy sector were graphed below to show relative strengths by dividend and price as of March 22, 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 price upsides and net gains including dividends less broker fees as of 2014.

Historic prices and actual dividends paid from $1000 invested in the 10 highest-yielding stocks and the aggregate single share prices of those 20 stocks divided by 2 created data points for 2013. Projections based on estimated increases in dividend amounts from $1000 invested in the 20 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 over a 15% lower dividend from $10K invested in this group while aggregate single share price was projected to increase by over 11% 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 (n/a).

Actionable Conclusion Three: Analysts Project 2014 M/Y Energy DiviDogs to Net 19.8% to 39%

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

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SandRidge Permian Trust netted $392.74, based on dividends plus a mean target price estimate off two analysts;

Pengrowth Energy (NYSE:PGH) netted $277.71 based on dividends plus mean target price estimate from six analysts;

Penn West Petroleum (NYSE:PWE) netted $272.89 based on a mean target price estimate from six analysts combined with projected annual dividend;

QR Energy netted $272.25, based on dividend plus mean target price estimates from 13 analysts;

SandRidge Mississippian Trust I netted $254.96 based on estimates from 21 analysts plus dividends;

LRR Energy netted $252.67 based on dividends plus the mean of annual price estimates from six analysts;

Crestwood Midstream Partners (NYSE:CMLP) netted $244.98, based on dividends plus mean target price estimate from nine analysts;

Seadrill (NYSE:SDRL) netted $234.85 based on dividends plus mean target price estimate from 12 analysts;

BreitBurn Energy Partners (BBEP) netted $209.30 based on a mean target price estimate from 13 analysts combined with projected annual dividend;

Memorial Production Partners netted $198.22 based on target estimates from seven analysts plus dividends.

The average net gain in dividend and price was 26.1% on $1k invested in each of these 10 dogs.

The above net gain estimates did not factor in any tax problems resulting from distributions (not dividends and K-1s) from MLPs and any possible re-capture tax problems/rates that could suck projected gains out of some of these estimates at the regular tax bracket rate and not capital gain rates. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

The stocks listed above were suggested only as decent starting points for your M/Y sector dividend stock purchase research process. These were not recommendations.

Disclosure: I am long PGH, 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.

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.