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 11 sector list, this report provided three actionable conclusions about the brightest dogs of the Morningstar/YCharts (M/Y) sectors: basic materials, communication services, consumer cyclical, consumer defensive, energy, financial services, healthcare, industrials, real estate, technology, and 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.
The online investor tutor, 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 Utilities Sector Selections for March were disclosed.
Dog Metrics Uncovered Brightest Utilities Stocks
The brightest 10 utilities sector stocks showing the biggest dividend yields March 22 by M/Y represented three industries: gas, diversified, and independent power producers. Top dog, Just Energy Group (NYSE:JE) was one of two diversified utilities firms. The other diversified utility, PVR Partners (NYSE:PVR), was fifth. Second place went to Niska Gas Storage Partners (NYSE:NKA), one of six gas utilities. The other gas firms were in third, fourth, sixth, ninth, and 10th places: American Midstream Partners (NYSE:AMID), Transportadora de Gas del Sur (NYSE:TGS), Suburban Propane Partners (NYSE:SPH), Amerigas Partners (NYSE:APU), and PAA Natural Gas Storage (NYSE:PNG). Two independent power producers in seventh and eighth places, TransAlta Corporation (NYSE:TAC) and Atlantic Power Corporation (NYSE:AT), completed the top 10 brightest yielding M/Y utilities dog list for March.
Dividend Vs. Price Results Compared to Dow Dogs
Below is a graph of the relative strengths of the top 10 M/Y utilities dogs by yield as of market close March 22, 2013, compared to those of the Dow. Historic projected annual dividend history from $1,000 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.
Click to enlarge images.
Actionable Conclusion: M/Y Utilities Dogs Flashed Bear Market Signal as Dow Went Bullish
March's M/Y utilities collection of dividend payers price moved down .63% in the past month. Aggregate dividend from $10,000 invested in each of those top 10 dogs dropped 8.4% since 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 $1,000 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.
Wall Street Wizards Weighed In
One-year mean target price set by brokerage analysts multiplied by the number of shares in a $1,000 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, Too: Analysts Anticipate 18% Net Gain From Top 20 M/Y Utilities Dogs In 2014
The top 20 dogs for the M/Y utilities 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 $1,000 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 $1,000 invested in the ten highest yielding stocks and the aggregate single share prices of those 20 stocks divided by two created data points for 2013. Projections based on estimated increases in dividend amounts from $1,000 invested in the 20 highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by two created the 2014 data points green for price and blue for dividends.
Yahoo projected over a 7.4% lower dividend from $10,000 invested in this group while aggregate single share price was projected to increase by over 8.2% 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 10 M/Y Utilities DiviDogs to Net 5.7% to 98.6% by March 2014
Ten probable profit generating trades revealed by Yahoo Finance for 2014 were:
- Energy Company of Minas Gerais (NYSE:CIG) netted $986.15, based on dividends plus a mean target price estimate off two analysts;
- Atlantic Power Corporation (AT) netted $726.62 based on dividends plus mean target price estimate from four analysts;
- American Midstream Partners (AMID) netted $302.14 based on a mean target price estimate from two analysts combined with projected annual dividend;
- PVR Partners (PVR) netted $229.47, based on dividend plus mean target price estimates from 11 analysts;
- TransAlta Corporation (TAC) netted $142.44 based on estimates from six analysts plus dividends;
- Inergy, L.P. (NRGY) netted $110.88 based on dividends plus the mean of annual price estimates from eight analysts;
- Entergy Corporation (NYSE:ETR) netted $78.27, based on dividends plus mean target price estimate from 13 analysts;
- Unitil Corporation (NYSE:UTL) netted $73.99 based on dividends plus mean target price estimate from three analysts;
- FirstEnergy (NYSE:FE) netted $71.06 based on a mean target price estimate from three analysts combined with projected annual dividend; and
- TECO Energy (NYSE:TE) netted $57.23 based on target estimates from 12 analysts plus dividends.
The average net gain in dividend and price was over 27.7% on $1,000 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 recapture 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 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.
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.