Last week David Fish published his Dividend Contenders Smackdown XXI on Seeking Alpha. He defines Contenders as "companies that have paid higher dividends for 10-24 years." This article utilizes the dogs of the index strategy to sort David's Contenders into a suitable grouping of ten to trade.
This is part of an ongoing effort to sort out an answer to the question, "which dividend stocks are good, better, best, bad or ugly?" It also aims to provide strong evidence of the need to heed Yale professor Robert Schiller's observation:
People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes.
The Dogs of the Index Strategy
Two key metrics determine the yields that rank 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. Investors select portfolios of five or ten stocks in any one index by yield to trade. They await the results from their investments in the lowest priced, highest yielding stocks they selected and pray that the price of every stock they now own climbs (having locked in a high yield percentage at purchase).
This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), reveals how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) can be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index.
Classic Dogs of the Index theory trades the Dow Index as of the first of January. So this is prime time to select stocks to trade.
Comparative Methods Used
First, David Fish's Contenders list of 145 companies paying increasing dividends for 10 to 24 consecutive years are sorted by yield to reveal the top 30. Market performance of these 30 selections is then reviewed using three months of historic projected annual dividend history.
Thereafter, today's article goes on to assess the relative strengths of David Fish's Top ten Dividend Contenders vs. the Dogs of the Dow December stock list. Annual dividends from $1000 invested in the 10 highest yielding stocks in each index versus the aggregate single share prices of the top 10 stocks in each index are compared.
Fish Dividend Contenders (Click to enlarge)
Mr. Fish's top ten Contender stocks paying the biggest dividends for December include firms representing four of nine market sectors. The top stock is one of two in the utilities sector. The balance of the top ten include one consumer, two financial and five basic materials firms The full list of 30 stocks has, two service, no healthcare, two consumer goods, fourteen financial, eight basic materials, no industrial, four utilities, no technology and no conglomerates representing the market sectors.
Vertical Moves in Fish Dividend Contender Stocks
Going back three months, one utility sector equity claimed the top of this list by yield. The heavy action is in the middle of the list. A sizable price gain was made by publisher Meredith Corp. (MDP) in the past three months, moving from 10th place by yield to 22nd by means of a price gain from $24.34 to $30.93. Conversely Avon Products (AVP) lost value moving from 30th place by yield at $22.30 to 15th place dropping to $16.58 in 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 twentieth position at least once between October and December 2011; (Green) firms listed in thirtieth position at least once between October and December 2011. Duplicates are depicted in color for highest ranking attained.
Click to enlarge:
December Dividend vs. Price Results for Fish Contenders vs. Dow
Below is a graph of the relative strengths of the top ten Fish Dividend Contender index stocks by yield as of December 9, 2011 compared to those of the Dow. Using three months of historic projected annual dividend history from $1000 invested in the 10 highest yielding stocks each month and the total single share prices of those 10 stocks creates the data points for each month shown in green for price and blue for dividends.
Click to enlarge:
Conclusion: Another Variable Team of Dogs Ready to Run
This Contenders collection of 30 mostly financial, basic material, and utilities making increasing dividend payments shows varied market performance during the recent unsettled conditions. The Dow index exhibited near convergence of both dividends from $1k invested in the top ten with aggregate total single share prices over the past three months. The Contenders index yields comparatively nearly 44% more annual dividends at a slightly higher aggregate single share price than the Dow.
At the end of each month, two summaries will conclude this new series of articles by showing comparative results of yield and price for all (now eleven) indices reported: Russell 1000; Sectors 3x9; S&P 500: NYSE International 100; NASDAQ 100; Dow 30; S&P 500 Aristocrats; JPMorgan Sovereigns; Carnavale Power 25; Fish Dividend Champions; Fish Dividend Contenders.
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. Prices and Returns on equities in this article are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.