This article reports results from the Dow 30 Index calculated as of April 1, 2013, projecting gain results one year hence. Seeking Alpha reader requests prompted this first installment in a new series of index-specific articles reporting dividend yield plus price upside results for 12 popular stock indices: Dow 30; S&P 500; Aristocrats; Russell 50; Nasdaq; NYSE International 100; Mergent Dividend Achievers; Champions; Contenders; Challengers; Carnevale's Power 25; and Carnevale's Super 29.
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 Dow 30 Index top dog selections for April were disclosed.
Dog Metrics Ranked Dow Stocks by Yield
CME Group, publisher if this index, states, "The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. indexes, such as the S&P 500 Index providing additional opportunities."
The April 1 Dow dogs included five of nine business sectors in the top ten by yield. Three of four technology firms showed the biggest dividend yields according to Yahoo: AT&T (T); Intel Corp (INTC); Verizon (VZ). A fourth tech firm, Microsoft (MSFT), placed seventh. Two healthcare firms ranked themselves in the fourth and eighth slots: Merck (MRK), and Pfizer (PFE). The lone industrial goods firm, General Electric (GE) placed fifth. Two basic materials firms placed sixth and tenth: Dupont (DD) and Chevron Corp. (CVX). The only services firm, McDonald's (MCD) rounded out the top 10 Dow list in ninth place.
Actionable Conclusion: Dow Dogs Dash Bull-Like but Remain Overbought
Projected annual dividend from $1,000 invested in each of the top 10 Dow dogs dropped over 1.1% since March, while aggregate single share price jumped over 5.3%. Dow dogs remain in an overbought condition as aggregate single share price of the 10 continued to exceed projected annual dividend from $1,000 invested in each of the ten by over $121 or 32%.
This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book Beating The Dow (HarperCollins, 1991), revealed how high yielding stocks whose prices increased (and whose dividend yields therefore decreased) could be sold off once a year to sweep gains and reinvest the 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." To add some confidence to the top dog rankings, an additional gauge of upside potential was added to the simple high yield metric used to sniff out bargains.
Wall Street Wizards Welcomed
One year mean target price set by brokerage analysts multiplied by the number of shares in a $1,000 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 Anticipate Near 8% Net Gain From Top 20 Dow Dogs in 2014
Top twenty dogs from the Dow 30 Industrials were graphed below to show relative strengths by dividend and price as of April 1, 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 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 $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.
Click to enlarge images.
Yahoo projected nearly a 4.5% lower dividend from $10,000 invested in this group while aggregate single share price was projected to increase over 5.7% 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.
Actionable Conclusion Three: Analysts Forecast 10 Dow DiviDogs to Net 5.7% to 29.7% by April 2014
Ten probable profit generating trades revealed by Yahoo Finance for 2014 were as follows:
- Caterpillar (CAT) netted $297.02, based on dividends plus a mean target price estimate by 19 analysts less broker fees;
- Microsoft Corporation netted $160.36 based on dividends plus mean target price estimate from 29 analysts less broker fees;
- JPMorgan Chase & Co. (JPM) netted $146.84 based on a mean target price estimate from 30 analysts combined with projected annual dividend less broker fees;
- Cisco Systems (CSCO) netted $133.14, based on dividend plus mean target price estimates from 32 analysts less broker fees;
- General Electric netted $121.68 based on estimates from 15 analysts plus dividends less broker fees;
- Merck & Co., Inc. netted $112.58 based on dividends plus the mean of annual price estimates from 15 analysts less broker fees;
- Intel Corporation netted $94.58 based on dividends plus mean target price estimate from 37 analysts less broker fees;
- Du Pont (E.I.) netted $73.25 based on a mean target price estimate from 14 analysts combined with projected annual dividend less broker fees;
- Chevron Corporation netted $70.38, based on dividends plus mean target price estimate from 22 analysts less broker fees;
- Coca Cola Co. (KO) netted $57.38 based on target estimates from 13 analysts plus dividends less broker fees.
The average net gain in dividend and price was over 12.6% on $1,000 invested in each of these 10 dogs. The stocks listed above were suggested only as decent starting points for your index dog 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.