On Friday, July 22, 2011, Thomas Lee, an equity strategist with JP Morgan, published a note titled “Corporates are the New Sovereigns: 22 stocks to own around sovereign default.” The Wall Street Journal article covering Lee's announcement defined a sovereign as an entity which can print money or tax at will. Lee's report listed 22 corporate stocks that show less risk of default than the U.S. government based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by JP Morgan, and showing upside to their target prices.
The simple Dogs of the Index trading strategy described in previous articles will be used over the coming months to track the net gains of the top 15 JP Morgan New Sovereign stocks ranked by projected dividend yields.
The following chart shows the JP Morgan New Sovereign 22 stocks sorted by projected dividend yields as of Friday, 7/22/11.
The "Dogs of the Index" Strategy
Investopedia explains the concept as "an investing strategy that consists of buying the 10 dogs of the dow (Dogs of the Index) stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks."
The strategy limits the involvement of the investor to focusing on just two key metrics that determine yields to rank the index dog stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock reveals the percentage yield by which each stock is ranked. After selecting this pool of 22 stocks from the JP Morgan list of Sovereigns, the investor is able to follow, trade and await the results from an investment in the lowest priced, highest yielding portion of the pool. A third variable of broker commission of $10 per trade will be deducted from every transaction to reveal net income. All the trades take place once a year.
Using data from Yahoo Finance, the following chart shows initial share amounts based on closing prices Friday (7/22/11) for a portfolio of 15 JP Morgan New Sovereign Stocks selected to track for the next 12 months.
Incremental results of $1,000 invested in each of these top five (yellow tint), plus top 10 (cyan tint), plus top 15 (magenta tint) JP Morgan Sovereigns will be reported monthly concluding next July based on the "Dogs of the Index" investing strategy described above. The color tints are introduced to highlight any repositioning of these stocks between the three tiers based on actual dividend yields posted in the coming months.
As background, several previous Seeking Alpha articles describe the "Dogs of the Index" strategy : Dogs of the Dow meet S&P 100 in a Seven Year Back Test; Comparing Dog Investing Strategies: Annual Net Returns for Various Index Components; 10 Dogs of the Dow Stocks: A 5 Year Back Test, and others.
Disclosure: I am long MRK.