This Morningstar/YChart (M/Y) report series began last month and was prompted by Seeking Alpha reader requests. 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 the baddest 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 Financial Services Sector Selections for March were disclosed.
Dog Metrics Uncovered Baddest Financial Services Stocks
The baddest 10 financial services stocks showing the biggest dividend yields as of March 22 according to Y/M screens represented five industries. First, a financial services sector stock, Arlington Asset Investment (AI), is one of three specialty financial firms on the list. The second dog, California First National Bancorp (CFNB), was the only regional bank listed. Other specialty financial firms showed up in the third and seventh slots, Dominion Resources Black Warrior Trust (DOM), and Ellington Financial LLC (EFC). One of two credit services firms was fourth on the list, Full Circle Capital (FULL). Fifth Street Finance (FSC), the other credit services firm, took tenth place. One of three asset management firms in the top 10, Prospect Capital Corporation (PSEC), was fifth. The other asset managers were TICC Capital (TICC), in sixth and Carlyle Group (CG) in ninth. 10 ten financial services dogs for February were completed by BGC Partners (BGCP), the lone capital management firm, as eighth dog on the list.
Dividend vs. Price Results Compared to Dow Dogs
Below is a graph of the relative strengths of the top 10 M/Y financial services dogs by yield as of market close 3/22/2013 compared to 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.
Actionable Conclusion: M/Y Financial Services Dogs Flashed Mixed Message as Dow Got Bullish
March's M/Y financial services collection of dividend payers continued a (bullish) upward price course set since November, 2012 as prices jumped up 9.7% in the past month. Aggregate dividends from $10k invested in each of those top 10 dogs also (bearishly) jumped 3% since last month.
The Dow, meanwhile went totally bullish as prices popped up 9.2% while dividends sank 3.1% last month. The Dow shows an overbought condition by 24% as aggregated single share price exceeded dividends 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 flush out bargains.
Wall Street Wizards 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 Anticipate 13.7% Net Gain from Top 20 M/Y Financial Services Dogs In 2014
Top 20 dogs for the M/Y financial services 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.
Yahoo projected nearly a 7% 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 Forecast 2014 M/Y Financial Services DiviDogs to Net 10.8% to 24.7%
Ten probable profit generating trades revealed by Yahoo Finance for 2014 were:
BGC Partners netted $246.98, based on dividends plus a mean target price estimate off five analysts;
TICC Capital netted $196.40 based on dividends plus mean target price estimate from five analysts;
Solar Capital (SLRC) netted $184.22 based on a mean target price estimate from nine analysts combined with projected annual dividend;
Carlyle Group netted $164.67, based on dividend plus mean target price estimates from eleven analysts;
Horizon Technology Finance (HRZN) netted $163.92 based on estimates from five analysts plus dividends;
TCP Capital (TCP) netted $141.27 based on dividends plus the mean of annual price estimates from four analysts;
Apollo Investment (AINV) netted $135.66, based on dividends plus mean target price estimate from eleven analysts;
Ellington Financial netted $132.33 based on dividends plus mean target price estimate from six analysts;
Fifth Street Finance Corporation netted $128.61 based on a mean target price estimate from eleven analysts combined with projected annual dividend;
BlackRock Kelso Capital Corporation (BKCC) netted $108.39 based on target estimates from six analysts plus dividends.
The average net gain in dividend and price was slightly over 16% on $1k invested in each of these ten 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.
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.