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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 Contender 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 Contenders have all recorded 10-24 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 Champions (at least 25 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 Contenders:

No.

12/30

Payout

TTM

Company

Symbol

Yrs

Price

Yield

%Ratio

P/E

Vector Group Ltd.

VGR

14

17.76

9.01

158.42

17.58

Northeast Indiana Bp.

NIDB.OB

17

12.20

5.90

50.70

8.59

Avon Products Inc.

AVP

22

17.47

5.27

54.12

10.28

Citizens Holding Co.

CIZN

11

17.52

5.02

59.46

11.84

People's United Fin'l

PBCT

19

12.85

4.90

116.67

23.80

First Keystone Corp.

FKYS.OB

11

20.50

4.88

55.87

11.45

Juniata Valley Financial

JUVF.OB

21

18.20

4.84

77.88

16.11

Meredith Corp.

MDP

18

32.65

4.69

56.67

12.09

Norwood Financial

NWFL

14

27.47

4.37

49.18

11.26

Auburn National Bp.

AUBN

10

18.52

4.32

55.56

12.86

Having a Near-Dog Experience...

...were several more banks and financial services firms, with yields of 3.87% to 4.27% at the end of 2011. The next companies on the radar were Microchip Technology (MCHP) at #16 in yield (3.80%), followed immediately by Watsco (WSO) (3.78%), and ConocoPhillips (COP) at #20 (3.62%). If the financial firms were eliminated, the “Dogs” would also include Maxim Integrated Products (MXIM) (3.38%), Linear Technology (LLTC) (3.20%), McGrath Rentcorp (MGRC) (3.17%), and Flowers Foods (FLO) (3.16%). So if an investor chose to ignore those financials, he or she would have several technology and other firms to consider for additional study.

Danger Dogs...

...would be a good description for companies that have high Price/Earnings ratios, like People's United, Payout Ratios above 100% (Vector Group and People's United), or “overdue” dividend increases – more than a year since the most recent increase – like Citizens Holding. 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:

A toss-up! Both Avon and Meredith show price lines well within the earnings-justified green-shaded area, so I'm including both charts below (click to enlarge images):

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



Disclosure: I am long COP.

Source: 2012 Dogs Of The Dividend Contenders