This new monthly series includes price information referenced in the previous sectors dividend yield comparison article, "Brazen Yield Gyrations of Dog Stocks in 8 Sectors."
This report was inspired when a Seeking Alpha reader requested "add[ed] relative financial data on the companies selected" for graphs comparing indices by annual yield projections. That request led to the development of a simple tool to chart investment risk. The tool gauges relative risk by revealing the divergence between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten highest yielding stocks in an index or sector versus the total prices of one share of each of the 10 stocks in that same index or sector.
A once per year trading system triggered by yield, the Dogs of the Index strategy is the basis for this article and the risk gauge. The dogs strategy popularized by Michael B. O'Higgins in "Beating The Dow" (HarperCollins, 1991) reveals 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 10 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.
The investment risk tool is constructed on a given date in the following manner: (1) Add the single share prices of the top 10 stocks on an index list. Then, (2) add the total annual dividend amounts projected from $1000 invested in each of those 10 stocks. Finally, (3) compare the resulting two numbers.
In this article the top 10 stocks of the venerable Dow Industrials index, also known as the Dogs of the Dow provide a baseline for comparison of risk/reward.
Graphing Dividends vs. Price
Each graph below shows monthly points of comparison between annual projected dividends resulting from $10,000 invested as $1,000 each in the top 10 high yield stocks (blue points) versus the total prices of one share of each of the10 stocks (green points) by sector or index. Grouped together the graphs display the comparative gyrations of the eight sectors against the Dow baseline index graph.
Annual Dividends from $1000 Invested in 10 Stocks Vs. Their Aggregate Single Share Prices
(Click charts to enlarge.)
Stocks Comprising Each Sector
The following charts display prices and projected annual dividends for 10 stocks comprising each sector surveyed between 12/9/11 and 12/16/11.
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. The basic materials sector top ten pay huge dividends with equally huge risk per share price than the Dow.
Consumer Goods Dividend Dogs
Top stock VGR is from the Cigarettes industry. Three of the top 10 basic materials companies are in the same Cigarettes industry group, MO and RAI are the others. Business Equipment and Personal Products industries have two companies each in the top 10. The consumer goods sector top 10 pay more dividends with equally more risk per share price than the Dow.
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. The financial sector top ten pay huge dividends with equally more risk per share price than the Dow.
Healthcare Sector Dividend Dogs
Top healthcare sector stock NBS is from the Specialized Health Services industry. Two of the top 10 healthcare companies are in the same Specialized Health Services industry group, NDZ is the other. Four of the top 10 healthcare companies are Drug Manufacturers-Major. The healthcare sector top 10 stocks pay slightly higher dividends with equally more risk per share price than the Dow.
Industrial Goods Sector Dividend Dogs
Top industrial goods sector stock XIN is from the Residential Construction industry (in China). Two of the top 10 industrial goods companies are in that same Residential Construction industry group, MDC is the other. Three of the top 10 industrial goods companies are Waste Management. Dividend yields increased as industrial goods sector prices declined to produce much more risk per share price than the Dow.
Services Sector Dividend Dogs
Seven of the top 10 services sector companies ranked by dividend yield are in the same Shipping industry group. The three companies in the top 10 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. Dividend yields soared as services sector prices declined to produce far more risk per share price than the Dow.
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 10 technology companies ranked by dividend yield are in the Telecom Services-Domestic industry group. Two more represent the Wireless Communications industry. Dividend yields soared as technology sector prices declined to produce greater risk per share price than the Dow.
Utilities Sector Dividend Dogs
Top utilities sector stock NKA is from the Gas Utilities industry. Four of the top 10 utilities companies ranked by dividend yield are in that same Gas Utilities industry group. Four more in the top 10 represent the Diversified Utilities industry. The remaining two are Electric Utilities. The utilities sector top 10 is more diverged but prices and dividends remained steady like the Dow chart. The greater divergence of the utilities sector chart portends greater risk per share price than the Dow.
The Baseline: Dogs of the Dow
Three of the top 10 stocks paying the biggest dividends on the Dow for December are technology companies. AT&T (T) tops this list. The remaining top 19 Dow dividend payers include one consumer goods, one financial, no services, one basic materials, one industrial, three healthcare, no utilities, and no conglomerates representing the market sectors. 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.
A reader request to "add relative financial data on the companies selected" for a previous article comparing indices by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 5 or 10 Dogs of the Index stocks at any point during the year. Using The Dow Index as the baseline standard of divergence, the eight sectors surveyed above rank themselves in the following order from high to low risk in December:
This information will continue to be reviewed monthly as one step toward Robert Shiller's admonishment to "make conservative preparations for possible bad outcomes."
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.