Top 10 Dividend Challengers Vs. Dogs Of The Dow In December

by: Fredrik Arnold

Last week Seeking Alpha published David Fish's Dividend Challengers Smackdown XXI. He defines Challengers as "companies that have paid higher dividends for 5-9 years." This article utilizes the dogs of the index strategy to sort David's Top ten Challengers into a suitable grouping 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 Shiller'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 Challengers list of 202 companies paying increasing dividends for five to 10 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. Here we look at annual dividends from $1000 invested in the ten highest yielding stocks in each index versus the aggregate single share prices of the top ten stocks in each index.

Fish Dividend Challengers

(Click charts to enlarge)

Mr. Fish's top ten Challenger stocks paying the biggest dividends for December include companies representing five of nine market sectors. The top stock is the only one in the technology sector. The balance of the top 10 include one consumer, three financial, one service, and four basic materials companies. The full list of 30 stocks has, five service, one healthcare, one consumer goods, seven financial, 13 basic materials, no industrial, two utilities, one technology and no conglomerates representing the market sectors.

Vertical Moves in Fish Dividend Challenger Stocks

Going back three months, two financial and one technology sector stocks claimed the top of this list by yield. That heavy action at the top of the list produced a sizable price gain for Triangle Capital Corp. in the past three months moving from first place by yield to third by means of a price gain from $16.17 to $18.93. Conversely StoneMor Partners lost value moving from ninth place by yield at $27.26 to fourth place dropping to $25.26 in under three months.

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

December Dividend vs. Price Results for Fish Challengers vs. Dow

Below is a graph of the relative strengths of the top ten Fish Dividend Challenger index stocks by yield as of December 9, 2011 compared with 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.

Conclusion: A Relatively HIgh Risk Team of Dogs Ready to Run

This Challengers collection of 30 mostly basic material, financial, and service sector equities making increasing dividend payments for the past five to 10 years shows varied market performance during the recent unsettled conditions. The Dow index exhibited near convergence of both dividends from $1k invested in the top 10 with aggregate total single share prices over the past three months. The Challengers index pay comparatively nearly 114% more annual dividends at a slightly lower aggregate single share price than the Dow with a similar increase in risk.

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 12) indices reported: Russell 1000; Sectors 3x9; S&P500: NYSE International 100; NASDAQ 100; Dow 30; S&P 500 Aristocrats; JPMorgan Sovereigns; Carnavale Power 25; Fish Dividend Champions; Fish Dividend Contenders; Fish Dividend Challengers.

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. 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.