Investors have utilized the dividend dog ranking system to select portfolios of five or ten stocks in the Dow Index to trade as of the last day in December. Thereafter the dog investors awaited annual 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).
As the traditional January first Dow dividend dog trading horizon nears, the following information is provided for you to evaluate and determine if a dance with dogs of the Dow is for you in 2014.
Dogs of the Dow Index Metrics
Two key numbers determined the yields that ranked stocks in the Dow index: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declared the percentage yield by which each dog stock was ranked.
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 increase (and whose dividend yields therefore decrease) could be sold off once each year to sweep gains and reinvest 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."
Investor Empowerment from the Dow Dogs
Listed below are the thirty Dow Index stocks by yield as of 11/30/12 per DogsoftheDow.com data. McGraw Hill Financial, publisher of this index, states: "The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average™ and Dow Jones Utility Average™.
While stock selection is not governed by quantitative rules, a stock typically is added to The Dow® only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the indices is also a consideration in the selection process."
The November 30, 2012 Dow featured seven of the December 18, 2013 top ten Dow Dogs by yield: AT&T (NYSE:T); Verizon (NYSE:VZ); Intel (NASDAQ:INTC); Merck (NYSE:MRK); McDonald's Corp. (NYSE:MCD); Pfizer (NYSE:PFE); Microsoft Corp. (NASDAQ:MSFT).
Hewlett-Packard (NYSE:HPQ), Alcoa (NYSE:AA), and Bank of America Corp. (NYSE:BAC)[shaded yellow above] were replaced on the Dow 30 list by Goldman Sachs (NYSE:GS), NIKE (NYSE:NKE), and Visa Inc. (NYSE:V) in September, 2013.
Wall St. Wizards Forecast 14.52% Avg. Net Gain from Top 10 Dow Dogs By 2013
One year mean target price set by analysts in November 2012 multiplied by the number of shares in a $1k investment plus annual dividends per share were used to compare the top ten 2013 Dow stocks. A $20 "broker fee" was deducted from each trade to determine net gains for each of the ten. 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.
Microsoft Corp. mean target price by 29 analysts plus dividends for 38 shares less broker fees projected a gain of 34.4% net to lead the Dow Dogs.
Analysts had lowest expectations for Hewlett-Packard as mean target price in Nov. 2012 by 21 analysts plus dividends from 77 shares less broker fees projected a gain of net 5% to trail the top ten Dow Dogs.
Actual 2013 Dow 34.2% Avg. Net Gain Stupefied Wizard Guesstimates by 19.6%
In contrast to analyst low expectations for Hewlett-Packard (evidenced by their projected a gain of net 5% to trail the top ten Dow Dogs) the former Dow member actually posted a 112.6% net gain to lead the Dow Dog team.
Microsoft placed second with 44.8%.
DuPont (NYSE:DD) at 44.3% and Johnson & Johnson with 37.4% will likely fall off the top ten list for 2014 due price increases dropping their yields below the top ten threshold of 3% next year.
The only underperforming dog for 2013 was AT&T Inc. which was projected by analysis to hit nearly 10% for the year. Unfortunately T share price upside was 33.7% below analyst expectations for 2013. AT&T's swoon was the only blemish on analyst upside forecasts. But perhaps you consider it a failure that the Wall St. wizards underestimated top ten dow dogs annual upside by nearly 20%.
The Wizard performance ranks at 90% for anticipating the Dow dogs 2013 upside.
3 Dogs Of Dow Beg 11% to 12% December 2014 Upsides
Dow 30 Results from Yahoo Finance tallied as of market closing prices December 18, 2013 compared with analyst mean target price results one year hence showed three stocks flashing 11.5% to 12.4% price upsides. Verizon Communications the New York City based telecom technology firm displayed 11.5% upside to show the lowest upside of those three. Cisco Systems (NASDAQ:CSCO) the San Jose, CA technology firm carded 12.24% to claim the middle ground. Coca Cola Co. (NYSE:KO) exhibited a 12.39% price upside to lead these three. Seven other top 20 dow dogs back in the pack by yield projected 5.7% to 8.9% upsides.
On the downside, three Dow stocks exhibited pending price slumps based on 1 yr. analyst mean target pricing. 3M Co. (NYSE:MMM) the St. Paul, MN based conglomerate was least bearish 1.72% down. Intel Corp. the Santa Clara, CA based semiconductor-broad line firm in the technology sector measured 2.58% to the downside to peg the mid point. Exxon Mobil Corp. (NYSE:XOM) the biggest dog of the dow, and Irving. TX based integrated oil & gas firm in the basic materials sector measured 2.63% to the downside to most tempt hungry bears.
The charts above used one year mean target price set by brokerage analysts matched against December 18 closing price to compare ten sector 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 were considered optimal for a valid mean target price estimate.
This article reports the Dow 30 Index as of the above date by projecting gain results one year hence. Seeking Alpha reader requests prompted this series of fourteen index-specific articles reporting dividend yield plus price upside results for these indices: Dow 30; Russell 2000; S&P 500; S&P Aristocrats; Russell 1000; NASDAQ 100; Champions; Contenders; Challengers; Carnevale's Power 25 & Super 29 lists combined as his Solid 40.
Investor Glossary summarized dividend dog methodology thus: "...[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 December were disclosed step by step.
Dog Metrics Rated Dow Stocks by Yield
The December 18 Dow dogs included five of nine business sectors in the top ten by yield. Four of five technology firms showed the biggest dividend yields according to indexArb.com: AT&T ; Verizon ; Intel Corp ; Cisco Systems . The fifth tech firm, Microsoft Corp. placed tenth. Two healthcare firms ranked themselves in the fifth, and eighth slots: Merck , and Pfizer . The lone basic materials representative, Chevron Corp. (NYSE:CVX), was sixth. The only services firm, McDonald's , placed seventh. The lone industrial goods firm, General Electric (NYSE:GE) was ninth and rounded out the top ten Dow list.
Dividend vs. Price Results for Dow Top 10 Stocks
Relative strength for the top ten Dow industrial index stocks by yield was graphed below. Ten periods of historic projected annual dividend history from $1000 invested in the ten highest yielding stocks and the total single share price of those ten stocks created the data points for each period shown in blue for dividend and green for price.
Actionable Conclusion (1): Dow Dogs Get Mauled, Overbought Bliss Dampened
Bearish sentiment returned to the dow dogs as projected annual dividend from $10k invested as $1K in each of the top ten Dow dogs increased nearly 2% since November. Aggregate single share price dropped nearly 3.8% to emphasize the bearish turn. The Dow dogs overbought condition in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten sank some. The overhang was $125 or 33% in August, and expanded to $161 or 43% for September, shrank down to $111 or 30% for October, expanded again to $140 or 38% in November, then closed a bit to $111 or 29% for December. Most of this bear attack was triggered by Microsoft replacing JPMorgan Chase & Co. (NYSE:JPM) at the end of the top ten Dow dogs this past month.
To quantify the top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential and was added to the simple high yield "dog" metric used to dig out bargains.
Actionable Conclusion Two (2): Wall St. Wizards Forecast 6.2% Net Gain from Top 20 Dow Dogs By 2014
Top twenty dogs from the Dow 30 Industrials were graphed below to show relative strengths by dividend and price as of December 18, 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 $20,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 2 created 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 dividend graphed from the plus row in the chart below exhibiting an over 6.36% net gain.
Factoring in a 0.20% loss from the negative net stock introduced above, a net net gain of 6.16% results.
Yahoo projected a 5% lower dividend from $10K invested as $1k in each dog of this group while aggregate single share price was projected to increase over 4.7% in the coming year. The forecast showed the Dow expanding on its overbought condition.
The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last last column on the chart. Three to nine analysts was considered optimal for a valid projection estimate.
A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposite of market direction.
Actionable Conclusion (3): Ten Dow DiviDogs to Net 6.7% to 13.9% by December 2014
Six of the top yielding dividend Dow dogs were verified as top gainers for the coming year by analyst 1 year target prices. So this month the dog strategy as graded by wall street wizards is 60% accurate.
Ten probable profit generating trades from $1k invested in each were revealed by Yahoo Finance and indexARB.com data for 2014 were:
Verizon Communications netted $139.07, based on dividends plus mean target price estimate from twenty-six analysts less broker fees. The Beta number showed this estimate subject to volatility 86% less than the market as a whole.
Cisco Systems netted $139.05, based on dividend plus mean target price estimates from thirty-five analysts less broker fees. The Beta number showed this estimate subject to volatility 24% greater than the market as a whole.
Coca Cola Co. netted $134.32 based on dividends plus a mean target price estimate from seventeen analysts less broker fees. The Beta number showed this estimate subject to volatility 73% less than the market as a whole.
AT&T Inc netted $112.05 based on estimates from twenty-four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 69% less than the market as a whole.
Chevron Corp. netted $103.85 based on a mean target price estimate from twenty-one analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 12% greater than the market as a whole.
JPMorgan Chase & Co. netted $97.40, based on dividends plus a mean target price estimate by thirty-eight analysts less broker fees. The Beta number showed this estimate subject to volatility 99% greater than the market as a whole.
McDonald's Corp. netted $80.66 based on target estimates from twenty-one analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 71% less than the market as a whole.
Pfizer Inc netted $93.21 based on a mean target price estimate from twenty-three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 18% less than the market as a whole.
Wal-Mart Stores (NYSE:WMT) netted $83.03 based on dividends plus the mean of annual price estimates from twenty-two analysts less broker fees. The Beta number showed this estimate subject to volatility 70% less than the market as a whole.
Procter & Gamble (NYSE:PG) netted $67.40 based on dividends plus mean target price estimate from nineteen analysts less broker fees. The Beta number showed this estimate subject to volatility 62% less than the market as a whole.
The average net gain in dividend and price was about 10.6% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 31% less than the market as a whole.
Actionable Conclusion (4): (Bear Alert) Analysts Forecast 3 Dogs of the Dow Sported Net Losses of .9% & 1.9% By December 2014
Three probable losing trades revealed by Yahoo Finance for 2014 were:
Intel Corp. lost $8.87, based on dividend and mean target price estimates from thirty-seven analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 16% less than the market as a whole.
3M Co. lost $11.97, based on dividend and mean target price estimates from eighteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 13% more than the market as a whole.
Exxon Mobil Corp. lost $19.20, based on dividend and mean target price estimates from nineteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 11% less than the market as a whole.
Stocks listed above were suggested only as possible starting points for your Dow 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.