Last week, your intrepid Dogs of the Index strategist applied dog dividend methodology in a new forward test of the Dogs of the Index metrics to each of eight major market sectors: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.
This new monthly series compares relative strengths of eight stock sectors by yield using projected annual dividends from $1000 invested in the ten highest yielding stocks in each sector. This is a new chapter in an ongoing effort to respond to the question, "which dividend stocks are good, better, best, bad or ugly?" The effort also aims to uncover strong evidence of the need to heed Yale economics professor Robert Shiller's admonition: "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."
Dogs of the Index Metrics Used to Select The Top Ten Stocks in Each Sector
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 or sector.
Below are charts and descriptions of the top ten December leaders by yield in each business sector. A concluding chart then compares the eight sectors by yield using projected annual dividends from $1000 invested in the ten highest yielding stocks in each sector to those of the Dow index as of December 9.
Basic Materials Dividend Dogs
Top stock TRU is from the Oil & Gas Equipment & Services industry. Only three of the top ten basic materials firms do not mention oil and gas in their industry description: GNI; OXE; TNH.
Consumer Goods Dividend Dogs
Top stock VGR is from the Cigarettes industry. Three of the top ten basic materials firms are in the same Cigarettes industry group, MO and RAI are the others. Business Equipment and Personal Products industries have two firms each in the top ten.
Financial Sector Dividend Dogs
Top financial sector stock 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.
Healthcare Sector Dividend Dogs
Top healthcare sector stock NBS is from the Specialized Health Services industry. Two of the top ten healthcare firms are in the same Specialized Health Services industry group, NDZ is the other. Four of the top ten healthcare firms are Drug Manufacturers-Major.
Industrial Goods Sector Dividend Dogs
Top industrial goods sector stock XIN is from the Residential Construction industry (in China). Two of the top ten industrial goods firms are in that same Residential Construction industry group, MDC is the other. Three of the top ten industrial goods firms are Waste Management.
Services Sector Dividend Dogs
Seven of the top ten services sector firms ranked by dividend yield are in the same Shipping industry group. The three firms in the top ten services sector not in the shipping industry are BSI in Grocery Stores, CPY in Personal Services, and FUN in General Entertainment. The data summarized here diverges from that first reported last week which did not include PRGN discontinuing its dividend as of 12/1/11.
Technology Sector Dividend Dogs
Top technology sector stock CIMT is the only stock of the top 30 from the Technical & System Software industry. Three of the top ten technology firms ranked by dividend yield are in the Telecom Services-Domestic industry group. Two more represent the Wireless Communications industry.
Utilities Sector Dividend Dogs
Top utilities sector stock NKA is from the Gas Utilities industry. Four of the top ten utilities firms ranked by dividend yield are in that same Gas Utilities industry group. Four more in the top ten represent the Diversified Utilities industry. The remaining two are Electric Utilities.
The Baseline: Dogs of the Dow
Three of the top ten stocks paying the biggest dividends on the Dow for December are technology firms. AT&T (T) tops this list. The remaining top ten Dow dividend payers include one consumer goods, one financial, no services, one basic materials, one industrial, three health care, no utilities, and no conglomerates representing the market sectors.
See the Dancing Sectors Dogs & Dow of Q4 2011 by Projected Dividend Yields
The following graph shows annual dividends projected from $1000 invested in each of ten stocks with the top yields in eight sectors compared to those of the Dow. The chart plots projected yields as of a specific purchase date near the middle of each month in the current Quarter. Projected yields increased in the sectors when average stock prices fell.
Relative yield strengths differentiate the sectors on the graph. The Dow shows the lowest yield with no swings. The healthcare, consumer goods, utilities, and financial sectors while generating higher yields also showed flat trajectories for the quarter.
Otherwise the industrial goods, basic materials, technology, and services sectors all threw higher yields as their component stock prices dropped during the quarter.
Annual Dividends Forecast from $1k Invested in each of 10 Top Yielding Stocks in 8 Sectors & the Dow
Projected dividend yield amounts from eight sectors over the past three months show fundamental variations in stock performance. These eight representative market indices display their relative strengths in top end dividend yield. Yields in December ranked the sectors in the following order from bottom to top after the Dow baseline: healthcare; consumer goods; utilities; industrial goods; basic materials; technology; financials; services.
The financial sector achieved top yield status in December at $1804.74 annual yield projected from $1000 invested in each of its top ten stocks, the service sector vector crossed paths with technology in Q4. At a lower level, the industrial goods vector surpassed the flat trajectory of utilities as it reached past the $800 level.
These eight sectors and their component stocks have ongoing stories to tell. This graph and list of companies will be updated again for publication in January and thereafter.
Disclaimer: This article is for informational and educational purposes only and should 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.