October Dog Show, Part II: Dividend Vs. Price Tests For 80 Index-Leading Stocks

|
 |  Includes: ABT, AGNC, AINV, ALSK, ANH, BKCC, CIM, CINF, CLX, CMO, CO, CQP, CTL, DD, DHT, DO, ED, FTR, GE, GNI, GOGL, GRMN, HCN, HPT, HTS, INTC, JNJ, JPM, KLAC, KMB, LEG, LLTC, LMT, MAT, MCHP, MO, MRK, MXIM, NGG, NOK, ORAN, PAYX, PBI, PEP, PFE, PG, RRD, RTN, SAN, SID, SLF, STX, T, TEF, TLK, TNK, VGR, VOD, VZ, WBK, WHX, WIN, YPF
by: Fredrik Arnold

This article supplies missing price information referenced in my October dividend comparison article, October Dog Show Part I. In August a Seeking Alpha reader requested that I "add relative financial data on the companies selected" for my graphs comparing seven indices by annual yield projections. That request led to the development of a simple tool to chart investment risk. The tool is used to gauge relative risks prior to the purchase of any 5 to 10 "Dogs of the Index" stocks with the highest dividend yields at any point during the year.

A once-per-year trading system triggered by yield, the Dogs of the Index strategy inspired this article and the risk gauge. The dogs strategy popularized by Michael B. O'Higgins in Beating The Dow (HarperCollins, 1991) reveals 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 index 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 investors, having selected their portfolios of five or ten stocks in any one index, are able to follow, trade, and await the results from their investments in the lowest-priced, highest-yielding stocks selected.

The investment risk tool is constructed on a given date in the following manner: (1) Add the single share prices of the top ten stocks on an index list. Then, (2) add the total annual dividend amounts projected from $1,000 invested in each of those ten stocks. Finally, (3) compare the resulting two numbers.

A standard for comparison of those resulting numbers was established in July, when JPMorgan's Thomas Lee pronounced the JPMorgan list if 22 New Sovereigns to be of lower risk than U.S. Treasury Bonds. 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 stocks showing less risk of default at that time than the sovereign U.S. Government based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by JPMorgan, and showing upside to their target prices.

The August graph shown for those JPMorgan New Sovereign stocks displays aggregate ten single share prices to be higher than projected dividends from $1,000 invested in each of the ten. By that standard of divergence, eight indexes surveyed in August ranked themselves in the following order from high to low:

Click to enlarge

Using JPMorgan's New Sovereigns as the baseline standard of divergence, the eight indexes surveyed rank themselves in the following order, from high to low risk, in September:

Perhaps this information reviewed monthly can be one step toward Yale economist Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."

Stocks In Each Index

The following charts display prices and projected annual dividends for ten stocks each index comprises, surveyed 10/7/11 to 10/24/11. Yield data for the Dow, NASDAQ, and S&P 500 index stocks is from indexarb.net. Russell, Sectors, Aristocrats, NYSE International, and JPMorgan Sovereigns yield data is from Yahoo Finance. Variations in divided projections from identical stocks on separate lists results from the data coming from separate sources with closing prices on different days. For example, PBI projected annual dividend is listed as $1.50 at $19.85 in the 10/20/11 indexarb.net database used for the S&P 500 Index, but as $1.48 at $20.65 by the 10/24/11 Yahoo Finance data used for the S&P 500 Aristocrats Index.

This month thirteen stocks repeat on two lists each: Abbott (NYSE:ABT); Alaska Communications (NASDAQ:ALSK); Merck (NYSE:MRK); Intel (NASDAQ:INTC); Johnson & Johnson (NYSE:JNJ); Procter & Gamble (NYSE:PG); CenturyLink (NYSE:CTL); Pitney Bowes (NYSE:PBI); American Capital (NASDAQ:AGNC); Frontier Communications (NYSE:FTR); AT&T (NYSE:T); Pepsico Inc. (NYSE:PEP); Cincinnati Financial (CINF).

Graphing Dividends vs. Price

Each graph below shows monthly points of comparison between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten high yield stocks (blue points) versus the total prices of one share of each of the ten stocks (green points) by index. Grouped together the graphs display the comparative gyrations of the eight indices.

Click to enlarge

Russell 1000 Index Dogs

These financial, service, technology, and consumer firms pay big dividends. This month American Capital Agency Corp. (AGNC) again tops this list at 20.98% yield as of 10/7/11. This index reveals even more divergence than any other list. Here total price paid remains fairly constant (even decreases) for a new basket of higher yielding stocks each month.

This months drop in yield was caused by the author changing charts in October. Larger cap Russell 1000 index stocks replaced the Russell 2000 stocks featuring mid caps used in previous months.

Top Dog Stocks by 3x9 Sectors

Composed of top dividend payers regardless of index and limited to three stocks from each of nine sectors. Those in the top ten include two financial firms (from the Russell Index), three basic material firms, two service companies, and two technology companies (one from the S&P index). DHT Holdings (NYSE:DHT) a service firm, is tops with an October 14 yield of 23.53% for this index.

Annual projected dividend totals for $1,000 invested in each stock blow away the aggregate total single share prices each month, and have continued to diverge further as prices have declined. That decreasing price trend does not bode well for Dog investors who yearn for prices to skyrocket after they purchase shares, so their stock yields plummet and price gains are maximized come trading time.

S&P 500 Index Dogs

Here are the top ten S&P 500 dividend-paying stocks. Frontier Communications (FTR) is tops with 12.36% yield on this index, as of 10/20/11. Dividends from $10,000 invested in top ten yielding stocks on this index have held well above the aggregated total prices of one share each all year. The tracks diverged widest in August, converging slightly in September, only to diverge again in October.

NYSE International 100 Index Dogs

These ten European-based companies listed on the NYSE show their dividend yields as of 10/20/11. This month, YPF Sociedad Anonima (NYSE:YPF), yielding 9.44%, returns to the top of this index, passing Telefonica, S.A. (NYSE:TEF). The annual projected dividend totals have surpassed the aggregate total single share prices all year for this index. Dividends began a move higher as prices moved lower in March. Dividends again increased as prices moved slightly lower.

Click to enlarge

NASDAQ 100 Index Dogs

These are top ten yielding stocks primarily from the Technology and Service Sectors. Seagate Technologies (NASDAQ:STX) is tops again in October, yielding 5.97% as of 10/20/11. The annual projected dividend totals from $1,000 invested in each surpassed the aggregate one share each price totals in June. These tracks achieved maximum divergence in August. Recently, NASDAQ dividends and price have nearly converged in September and October now coming within $13 of their July divergence.

Click to enlarge

S&P 500 Aristocrats Dogs

These are the ten top yielding stocks from companies paying and increasing dividends each year for 25 years or more on the S&P 500 Index. CenturyLink (CTL) is again tops in yield on this index, at 8.31% as of 10/24/11. The graph shows dividend totals still now falling below price totals in October.

Click to enlarge

Dow Industrial Index Dogs

Below are the current Dow Dogs. AT&T (T) persists at the top, now with a yield of 6.07% as of 10/20/11. The Dow Dog dividend versus price history reveals dividends from $10,000 invested as $1,000 each in the top ten yielding stocks in October staying above the aggregate price totals of one share each of those ten stocks, which moved slightly higher toward convergence.

Click to enlarge

JPMorgan New Sovereigns Dogs

These are the top dividend paying stocks that, according to a JPMorgan equity strategist, 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 JPMorgan, and showing upside to their target prices.

Merck (MRK) had topped this list since January but was replaced at the top by Lockheed Martin (NYSE:LMT) for October by virtue of a September 22 $1 annual dividend increase pegging its yield at 5.08%. Note that the likelihood of dividend totals surpassing price totals grew closer in September, but diverged again in October.

Conclusion

A reader request to "add relative financial data on the companies selected" for my August article comparing seven sectors by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 10 Dogs of the Index stocks at any point during the year. Using JPMorgan's New Sovereigns as the baseline standard of divergence, the eight indexes surveyed rank themselves in the following order from high to low risk in October:

Click to enlarge

This information will continue to be reviewed monthly as one step toward Yale Economist Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."

Disclosure: I am long MRK, T, VZ, INTC, CVX, JNJ.

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.