Introducing Dogs Of The Carnavale Power 25 Index

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by: Fredrik Arnold

A once per year trading system triggered by yield, the Dogs of the Index strategy, was popularized by Michael B. O'Higgins in the book Beating The Dow (HarperCollins, 1991), revealing 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.

O'Higgins' book focused on the Dow, otherwise known as Dow Jones, a CME Group Company, which states:

The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. Indexes, such as the S&P 500 Index providing additional opportunities.

Recent articles have investigated and compared projected dividend yields of top the 30 stocks from eight indices including the (1) Russell 1000; (2) Sectors 3x9; (3) S&P 500: (4) NYSE International 100, (5) NASDAQ 100; (6) Dow 30; (7) S&P 500 Aristocrats; (8) JPMorgan Sovereigns, in an effort to sort out which dividend stocks are good, better, best, bad or ugly.

In November, respected analyst and Seeking Alpha contributor Chuck Carnavale published "25 Blue Chip Dividend Growth Stocks With Attractive Prospects For Above-Average Total Returns."

Mr. Carnavale's portfolio review listed top 25 blue chip dividend growth stocks (1) available at current valuations that were significantly below their historical norms (2) remained profitable through the great recession of 2008 and 2009. The resulting portfolio of companies Mr. Carnavale states:

offers a three-pronged opportunity for above-average future total returns at below-average risk. We expect that each company will benefit in the future from a potential expansion in their PE ratios coupled with future earnings growth and finally followed by dividend increases offering a return kicker.

Here's Mr. Carnavale's list ranked by yield as of December 7, 2011 :

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Mr. Carnavale's top ten stocks paying the biggest dividends for December include firms representing six market sectors. The top stock is one of two in the service sector. The balance of the top ten include two consumer goods, one technology, one basic material, one utility, and three healthcare firms The full list of 25 stocks has, five service, five healthcare, three consumer goods,one financial, three basic materials, five industrial, one utility, one technology and no conglomerate representing the market sectors.

Vertical Moves in Carnavale Index Stocks

Going back three months, just one firm, RR Donnelly (NASDAQ:RRD), has stayed at the top of this list by yield. The action is in the middle of the list. A notable price gain has been made by Home Depot rocketing from eleventh place by yield to eighteenth by virtue of a price gain from $35.05 to $40.73 in just under three months.

Color code shows: (Yellow) firms listed in first position at least once between October and December 2011; (Cyan Blue) firms listed in tenth position at least once between October and December 2011; (Magenta) firms listed in fifteenth position at least once between October and December 2011; (Green) firms listed in twenty fifth position at least once between October and December 2011. Duplicates are depicted in color for highest ranking attained.

December Dividend vs. Price Results

Below is a graph of the relative strengths of the top ten Carnavale Power 25 index stocks by yield as of December 7, 2011. Using eleven 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.

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A New Team Of Dogs Ready To Run

This Carnavale collection of 25 powerful dividend payers shows steady market performance during the recent unsettled conditions. The index exhibited near convergence of both dividends from $1,000 invested in the top ten with aggregate total single share prices over the past three months. This index compares favorably with three most popular and reliable indices reported in this series: the Nasdaq100, Dow 30 and S&P 500 Aristocrats.

At the end of each month, two summaries conclude this series of articles by showing comparative results of yield and price for all (now nine) indices reported: Russell 1000, Sectors 3x9, S&P500, NYSE International 100, Nasdaq 100, Dow 30, S&P 500 Aristocrats, JPMorgan Sovereigns, and Carnavale Power 25.

Disclosure: I am long JNJ, INTC, CVX.

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.