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In compiling the Dividend Champions list (found here) I get a chance to screen the database using a number of criteria, and I often run across related strategies that might be of interest to readers. One such approach is the well known “Dogs of the Dow” strategy that simply picks the 10 highest yielding stocks from the Dow Jones Industrial Average at the start of the year and holds them until the end of the year. It was highlighted by the book Beating the Dow by Michael B. O'Higgins and John Downes in 1991 and even has its own website (here).

The success of the Dow Dog strategy has varied in recent years as its popularity has attracted more participants. And there are many variations of the approach, such as a “Small Dogs” version that suggests owning the five lowest-priced stocks from among the 10 high yielders. Naturally, attempts have been made to apply the “Dogs” strategy to other indices or groups of companies, and that brings us to this article.

Dividend Champion Dogs

It seems only natural to apply this strategy to a listing of companies that have increased their dividends for many years. The logic is the same: The yields on depressed stocks will have been driven up, giving the investor a group of candidates that have not only rebound potential, but also a strong dividend that “pays them to wait.” Dividend Champions have all recorded at least 25 straight years of dividend increases, so they have proven their willingness to pass profits along to shareholders. (Note that I am submitting separate articles about the “Dogs” of the Dividend Contenders (10-24 years of increases) and Challengers (5-9 years), so please look for those, as well.)

Fellow Seeking Alpha author Fredrik Arnold has been publishing articles about various “Dogs” for some time and recently included pieces on the Champions, Contenders, and Challengers. But my own thinking about the approach varies somewhat from Fredrik's in that I would adhere more closely to the Dow Jones conventions in screening the listings. As you may be aware, Dow Jones keeps separate indices for Utilities and Transports, so its “Dogs” exclude those groups. (One exception is that Telecommunications providers – which many of us consider Utilities – are included in the Dow Jones Industrial Average, so I will also include them.) The DJIA also excludes Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), and foreign stocks (traded as American Depository Shares, or ADRs), among other classifications, so I will also exclude those from consideration. So, without further ado, here are the 2012 Dogs of the Dividend Champions:

No.

12/30

Payout

TTM

Company

Symbol

Yrs

Price

Yield

%Ratio

P/E

Pitney Bowes Inc.

PBI

29

18.54

7.98

71.15

8.91

Old Republic Int'l

ORI

30

9.27

7.55

-86.42

-11.44

AT&T Inc.

T

28

30.24

5.82

89.34

15.35

Altria Group Inc.

MO

43

29.65

5.53

98.20

17.75

Mercury General Corp.

MCY

25

45.62

5.35

151.55

28.34

Cincinnati Financial

CINF

51

30.46

5.29

164.29

31.08

Bowl America Class A

BWL-A

39

12.86

4.98

220.69

44.34

Leggett & Platt Inc.

LEG

40

23.04

4.86

94.12

19.36

United Bankshares Inc.

UBSI

38

28.27

4.39

75.15

17.13

Eagle Financial Svcs

EFSI

25

16.81

4.28

58.06

13.56

Having a Near-Dog Experience...

...were tobacco company Universal Corp. (NYSE:UVV) and Community Trust Bancorp (NASDAQ:CTBI), with yields of 4.26% and 4.21%, respectively, at the end of 2011. Obviously, it would have taken just a few late ticks in the share prices for these to have qualified, so they may also be worthy of additional study.

Danger Dogs...

...might be a good description for some of the companies in the listing above, thanks to having negative (trailing twelve-months) Earnings Per Share (Old Republic International), Price/Earnings ratios of 28 or higher and Payout Ratios above 100% (Mercury General, Cincinnati Financial, and Bowl America), and “overdue” dividend increases – more than a year since the most recent increase – for Bowl America and Eagle Financial. Obviously, caution is advised.

And the Best-Looking Dog in the Bunch...

...based on a visual analysis of the F.A.S.T. Graphs from Chuck Carnevale, is:

None of the above! Well, let me qualify that a bit. Of the 10 “Dogs,” only Pitney Bowes shows a price line well within the earnings-justified green-shaded area (click to enlarge images):

...but I'm sure many would balk at its declining earnings trend (prior to next year's estimated increase) and its 96% debt level, not to mention its high payout ratio and what many consider its “doomed” industry. Having said that, of course, one has to ask, “Isn't that the nature of the Dogs strategy?” So the advice is obviously to “enter at your own risk.” Possibly a better alternative would be the “Near Dog” UVV, provided the prospective investor is willing to accept ownership of a tobacco company:

Be sure to check the accompanying articles on the “Dogs” of the Dividend Contenders and Challengers for more ideas.

Source: 2012 Dogs Of The Dividend Champions