Financial Dogs Vs. December Dogs Of The Dow

by: Fredrik Arnold

Up until now, this Dogs of the Index strategist has applied dog dividend methodology only to lists of stocks created for a publisher's stated purpose.

For example, CME Group 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.

McGraw Hill states:

Standard & Poor’s strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions.

The company says that the S&P 500 index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities.

Nasdaq states:

The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial securities listed on The Nasdaq Stock Market based on market capitalization... It does not contain securities of financial companies including investment companies.

Russell Investments states its purpose as "improving financial security for people." The company says its Russell 1000 Index offers investors access to the "extensive large-cap segment of the U.S. equity universe, representing approximately 90% of the U.S. market."

You get the idea. Every publisher has a different perspective and builds a list of equities as a baseline for comparing periodic gyrations in the market. To this end, the financial publishing community contributes to the malady diagnosed by Yale professor Dr. Robert Schiller, who has observed:

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.

Herein is launched a new forward test of the Dogs of the Index metrics, applied individually to each of eight major market sectors. These sectors are basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

The ninth sector, conglomerates, contains just eight firms, five of which pay dividends, so dogs of the index metrics do not apply in such a limited universe. Such a task is comparable to a dog show judge trying to evaluate a Chihuahua based on St. Bernard breed conformation standards.

Dogs of the Index Metrics Used to Select The Top Ten Financial Sector Stocks

Two key metrics determine the yields that rank index or sector 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 or sector 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 higher (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.

Comparative Methods Used

First, the entire list of financial sector companies is sorted by yield as of December 12 using to reveal the top thirty. Market performance of these thirty selections is then reviewed using three months of historic projected annual dividend history from Yahoo Finance.

Thereafter, today's article goes on to assess the relative strengths of the financial sector top ten dividend dogs vs. the Dogs of the Dow December 9 stock list. Here we look at annual dividends from $1,000 invested in the ten highest yielding stocks in each sector or index versus the aggregate single share prices of the top ten stocks in each sector or index.

Financial Sector Dividend Dogs

Click to enlarge.

The top ten financial stocks paying the biggest dividends for December represent one sector. Top financial sector stock, BBVA Banco Francs (NYSE:BFR) is from the Foreign Regional Banks industry, the sole stock in the top 30 from that industry. Five of the top ten financial firms are REITs. Three are Residential REITs, one is a Diversified REIT, and one a Retail REIT. The Diversified Investments industry has two firms in the top ten.

Of the top thirty, sixteen firms are REITs. Nine are Residential REITs, six are Diversified REITs, and one a Retail REIT. Other financial sector industries represented by more than one firm are: Diversified Investments, and Asset Management, with three; Mortgage Investment, with two.

Vertical Moves in Financial Dividend Dog Stocks

Going back three months, American Capital Agency (NASDAQ:AGNC) claimed the top of this list by yield for the first two months of the quarter, then BFR rose from tenth place in October to take the lead by yield in December by virtue of a price drop from $6.69 to $5.15 in two months. The action is in the middle and at the bottom of the list is equally dramatic. A notable price drop was made by CommonWealth REIT (NYSE:CWH) in November moving from thirtieth place by yield to twenty-eighth by virtue of tanking from $18.90 to $17.43 in one month, then dropping further to twenty-sixth place at $16.60 in December. Also, Britton & Koontz (OTCQB:bkbk) moved higher in yield from thirtieth to twenty-fourth place recording a 12% price drop. Conversely, Dynex Capital (NYSE:DX) gained value moving from twenty-third place at $8.85 in October to twenty-seventh place at $9.35 in December.

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.

December Dividend vs. Price Results for Financial Dogs vs. Dow Dogs

Below is a graph of the relative strengths of the top ten financial sector stocks by yield as of December 12, 2011 compared to those of the Dow. Using three months of historic projected annual dividend history from $1000 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.

Conclusion: A Purebred Pack of Wolves Ready to Howl

This financial collection of 30 dividend payers shows multi-directional market performance during the recent unsettled conditions. The Dow 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. In contrast, the financial sector top ten pay huge dividends with equally more risk per 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 eight sectors reported: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

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.

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