October's 'Dogs Of The JPMorgan Sovereigns'

by: Fredrik Arnold

Many investment advisors have recommended dividend-paying stocks as a possible safe haven in bear markets. Recent articles have investigated and compared projected dividend yields from eight indices in an effort to sort out an answer to the question: Which dividend stocks are good, better, best, bad or ugly?

Until now, this series of articles has provided information without noting that any portfolio of stocks is only as strong as the grounds for its collection. Much like a building is planned and built to suit its location, so must a stock portfolio be built to suit the owner's purpose.

The Need for Investment Research

Some investors select dividend stocks based on fundamental financial reports from individual companies. This approach is central to the existence of this Seeking Alpha forum. Readers and writers herein can debate and compare the relative merits of their favorite stock picks for their buy and hold portfolios.

Meanwhile, in the world of finance and publishing, many well-paid financial wizards busy themselves attempting to gain followers and credibility for their chosen collections of equities. These organizations include:

  • Russell Investments, a Washington, USA Corporation, a subsidiary of Northwestern Mutual Life Insurance Company publishes the Russell 1000 index.
  • Standard and Poors, a division of McGraw Hill, publishes indices including the S&P 500 and the S&P 100.
  • Dow Jones, a CME Group Company, aggregates the Dow Jones Industrial index of 30 stocks selected to represent the market as a whole, which is commonly called the DOW.
  • Nasdaq - its initials are the acronym for the National Association of Securities Dealers Automated Quotations. It was the nation's first electronic stock exchange.
  • NYSE stands for the New York Stock Exchange and, as NYSE Euronext, publishes an index of 100 international stocks, among others.
  • CBOT stands for Chicago Board of Trade, a designated contract market reported by CME Group which declares itself as "the world's leading and most diverse derivatives marketplace."
  • JPMorgan Chase (JPM), Morgan Stanley (MS), Merrill Lynch, Morningstar, Vanguard, Fidelity, Edward Jones, and nearly all investment houses collect lists of equities to serve various market niches.

A Shortcut to Investment Wisdom

October, as the start of the fourth quarter of the year, also signals the start of the profit-generating equity trading season. It heralds the much quoted "buy in October, sell in May" admonition.

As a shortcut to determining the best of the best dividend stocks, many investors rely on a once-per-year trading system triggered by yield, called the "Dogs of the Index" strategy. This strategy gives the investor the tactical advantage of obtaining all the wisdom and knowledge of the well-paid wizards of investment and publishing for free merely by choosing to invest in the existing collection of equities built by those experts.

The charts below reveal low-yielding stocks whose prices increase (or whose dividends decrease) to be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index. Two key metrics determine the yields that rank the JPMorgan Sovereign dog stocks: (1) Stock Price; (2) Annual Dividend. Dividing the annual dividend by the price of the stock declares the percentage yield by which each dog stock is ranked. Thus the investor is able to follow, trade, and await the results from an investment in the lowest priced, highest yielding five or ten stocks in the index.

Revelations from the JPMorgan Sovereigns Index for October

Below are the 22 picks for October served up as of October 24 by Yahoo.

Finance as the top dividend yielding stocks listed on the JPMorgan Sovereigns Index. On July 22, 2011, Thomas Lee, an equity strategist with J.P. Morgan, published a note titled “Corporates are the New Sovereigns: 22 stocks to own around sovereign default.” The Barron's 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 sovereign U.S. government, based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by J.P. Morgan, and showing upside to their target prices. This month Lee's index has a new top dog, Lockheed Martin (NYSE:LMT), which raised its dividend by a dollar annually as of 9/22/11.

Click tables/charts to enlarge.

Two of the top ten stocks paying the biggest dividends on the JPMorgan Sovereigns for October are industrial firms. For the first nine months of 2011, Merck (NYSE:MRK), a healthcare firm, topped this list by yield. However, by raising it's dividend $1 annually the industrial firm, LMT came in at at 5.08% yield as of market close October 24 to put an industrial firm at the top.

For these 22 JPMorgan Sovereign dividend payers, four technology companies, three consumer goods, no financial, five services, two basic materials, two industrial, four health care, no utility, and two conglomerates represent the market sectors.

October Changes in S&P Aristocrat Index Stocks

As mentioned above, LMT replaced MRK at the top of the list. Color code shows: (Yellow) firms listed in first position at least once between January and October 2011; (Cyan Blue) firms listed in fifth position at least once between January and October 2011; (Magenta) firms listed in tenth position at least once between January and October 2011; (Green) firms listed in fifteenth position at least once between January and October 2011. Duplicates are depicted in color for highest ranking attained. Until JPM updates it, this list is fixed at these same 22 stocks.

October Dividend vs. Price Results for JPMorgan Sovereign Index Top 10

Below is a graph of the relative strengths of the top ten JPMorgan Sovereign Index stocks by yield as of October 24, 2011. Using ten months of historic projected annual dividend history from $1,000 invested in the ten highest-yielding stocks each month and the total single share prices of those ten stocks creates the data points for each month, shown in green for price and blue for dividends.


The October JPMorgan Sovereign component update showed a bear market divergence where dividends increased as aggregate total single share prices dropped. If the bears continue hold sway with this collection in the month to come and share prices continue to drop away from dividend yield, this chart of dividends vs. prices could then revert to the January gap between total annual dividend returns on $1,000 invested in top ten stocks vs. their aggregate single share prices. Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only, and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.