This monthly series adds missing price information referenced in the previous dividend comparison article. This report was inspired in August when 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 10 Dogs of the Index stocks with the highest dividend yield 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 $1000 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:
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 Shiller's admonishment to "make conservative preparations for possible bad outcomes."
In October the eight indexes surveyed ranked themselves in the following order from high to low risk:
Stocks comprising each Index
The following charts display prices and projected annual dividends for ten stocks comprising each index surveyed 11/11/11. Yield data for the Dow, NASDAQ, and S&P 500 index stocks is from here. 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. For example PBI projected annual dividend is listed as $1.50 at $19.44 in the 11/11/11 indexarb.com database used for the S&P 500 Index but as $1.48 at $19.44 by the Yahoo Finance data used for the S&P 500 Aristocrats Index
This month twelve stocks repeat on two lists each: Abbott (ABT), Alaska Communications (ALSK), Merck (MRK), Intel (INTC); Johnson & Johnson (JNJ), CenturyLink (CTL), Pitney Bowes (PBI), American Capital (AGNC), Frontier Communications (FTR), AT&T (T), Cincinnati Financial (CINF), and Teekay Tankers (TNK).
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 and service firms pay big dividends. This month American Capital Agency Corp. again tops this list at 19.92% yield as of 11/11/11. This index reveals 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.
October's drop in yield was caused by the author changing source data based on the larger cap Russell 1000 index to replace the Russell 2000 index that includes mid-caps. Still the downward trend in dividends continues this month caused primarily by price increases for the top two stocks by yield resulting in fewer shares purchased to generate dividends.
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 three financials, two basic material firms, two service companies, and two technology companies (one from the S&P index). Chimera Investment (CIM) a financial firm is tops with an November 11 yield of 19.92% for this index. Last month's top dog by yield, DHT fell out off the chart after it cut the dividend 70%.
Annual projected dividend totals for $1000 invested in each stock remain way ahead of the aggregate total single share prices this month, but have reversed polarity to begin to converge as dividend totals have declined while stock prices rose slightly. That reversal is a welcome sight 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 is again tops with 13.18% yield on this index, as of 11/11/11. 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, and again in November as prices declined greater than dividends.
NYSE International Index Dogs
November NYSE International 100 Index components are led by YPF, an Argentine Basic Materials (Energy) company at 9.28% yield, followed by two telecoms and a bank. Dividends from $10,000 invested in top ten yielding stocks on this index have continuously diverged above the aggregated total prices of one share each all year. November update shows this bear market divergence holding steady with both dividends from $1k invested in the top ten and the aggregate total single share prices dropping slightly.
NASDAQ 100 Index Dogs
These are top ten yielding stocks primarily from the Technology and Service Sectors. Vodafone (VOD) rises to the top in November, yielding 5.30% as of 11/11/11. The annual projected dividend totals from $1000 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 grew closer in September and October now in November coming within $71 of their May convergence.
Dow Industrial Index Dogs
Below are the current Dow Dogs. AT&T (T) persists at the top, now with a yield of 5.98% as of 11/11/11. The Dow Dog dividend versus price history reveals dividends from $10,000 invested as $1,000 each in the top ten yielding stocks in November staying barely above the aggregate price totals of one share each of those ten stocks, which moved slightly higher toward convergence.
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. CenturyLinkis again tops in yield on this index, at 7.67% as of 11/11/11. The graph shows dividend totals now rising above price totals in November.
JPMorgan New Sovereigns Dogs
These are the top dividend paying stocks that -- a JPMorgan equity strategist says -- 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 had topped this list since January but was replaced at the top by Lockheed Martin (LMT) for October by virtue of a September 22 one dollar annual dividend increase. LMT remains on top yielding 5.17% as of 11/11/11. Note that the likelihood of dividend totals surpassing price totals grew closer in September but diverged again in October and November. We'll see how the yield battle for the top slot fares after Merck's declared dividend increase impacts the Yahoo Finance source data for this index.
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 5 or 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:
This information will continue to be reviewed monthly as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."
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.