This new monthly series compares relative strengths of five stock indexes by yield and dividend vs. price gaps using projected annual dividends from $1000 invested in the 10 highest yielding stocks in each index. This is another part of 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 professor Robert Shiller's observation: "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."
Previous posts in December brought forward the Carnevale Power 25 Index as a dividend dog investment vehicle. (Apologies to Chuck for misspelling his name in the previous article.) December also launched Dogs of the Index methodology applied to David Fish's vaunted Champions, Contenders and Challengers lists. A Composite CCC Index was also created. This then, is the year-end summary as of December 30 for those five fabulous indexes designed By Chuck and David to stimulate buy and hold methodology. Hats off to David Fish for applying Dow limits to his CCC Dog lists in a Seeking Alpha post in December. David published his Dow variation of the dogs of the index strategy by removing all utility sector companies from his yield-based lists.
Dogs of the Index Metrics Used to Select The Top 10 in Each Index
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 10 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.
Below are summaries of the five indices:
Carnevale Power 25 Index
In November respected analyst and Seeking Alpha blogger, Chuck Carnevale published the article titled Our Top25 Growth Stocks Are Dirt Cheap. His portfolio review listed top 25 blue-chip dividend growth stocks (1) available at current valuations that were significantly below their historical norms (2) remained profitable through the great recession of 2008 and 2009. The resulting portfolio of companies Mr. Carnevale states "offers a three-pronged opportunity for above-average future total returns at below-average risk. We expect that each company will benefit in the future from a potential expansion in their PE ratios coupled with future earnings growth and finally followed by dividend increases offering a return kicker."
The top10 stocks paying the biggest dividends as of December 30 included companies representing six market sectors. The top stock as revealed by Yahoo Finance data, is one of two in the service sector, RR Donnelley & Sons (NASDAQ:RRD). The balance of the top 10 include two consumer goods, one technology, one basic material, one utility, and three healthcare companies. The full list of 25 stocks had five service, five healthcare, three consumer goods, one financial, three basic materials, five industrial, one utility, one technology and no conglomerate representing the market sectors.
Fish Dividend Champions Index
David Fish's Champions list of 102 companies paying increasing dividends for 25 consecutive years or more was sorted by yield to reveal the top 30. Data for all four Fish indices is sourced from Mr. Fish's drip investing tools.
Mr Fish's top 10 Champion stocks paying the biggest dividends as of December 30 included companies representing four market sectors. The top stock Pitney Bowes (NYSE:PBI) was the only one in the service sector. The balance of the top 10 include one technology, five financial, and three consumer goods companies. The full list of 30 stocks has, two service, two healthcare, eight consumer goods, nine financial, one basic materials, one industrial, six utilities, one technology and no conglomerates representing the market sectors.
Fish Dividend Contenders Index
David Fish's Contenders list of 145 companies paying increasing dividends for 10 to 24 consecutive years were sorted by yield to reveal the top 30.
The top 10 Contender stocks paying the biggest dividends as of December 30 included companies representing four of nine market sectors. The top stock Inergy LP (NRGY) was one of two in the utilities sector. The balance of the top 10 include one consumer, two financial, and five basic materials firms The full list of 30 stocks had, two service, no healthcare, two consumer goods, 14 financial, eight basic materials, no industrial, four utilities, no technology and no conglomerates representing the market sectors.
David Fish's Challengers list of 202 companies paying increasing dividends for five to 10 consecutive years was sorted by yield to reveal the top 30.
Mr Fish's top 10 Challenger stocks paying the biggest dividends as of December 30 included companies representing four of nine market sectors. The top stock Dynex Capital, Inc. (NYSE:DX) was one of four in the financial sector. The balance of the top 10 included one consumer, one service, and four basic materials companies. The full list of 30 stocks has five service, one healthcare, one consumer goods, seven financial, thirteen basic materials, no industrial, two utilities, no technology and no conglomerates representing the market sectors.
The combination of David Fish's 102 Champions, 145 Contenders, and 202 Challengers was sorted by yield to reveal the top 10 of each. These were further sorted to reveal the top 10 overall as of December 30.
The top 10 CCC Combination stocks paying the biggest dividends for December include companies representing six market sectors. The top stock, Dynex Capital, Inc. is a financial sector equity from the challengers. The balance of the top 10 included one technology, one service, two consumer goods, one basic materials, and four more financials. The full list of 30 stocks has two service, one healthcare, five consumer goods, 10 financial, eight basic materials, no industrial, two utilities, two technology, and no conglomerates representing the market sectors.
Companies in the top 10 for each index
The following charts display prices and projected annual dividends for 10 stocks comprising each index surveyed 12/30/11. Adjacent to the charts are graphs showing 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 the 10 stocks (green points). Grouped together the graphs display the comparative gyrations of the five indices.
See the Fish CCC/Carnevale Dogs Shown by Projected Dividend Yields
The following graph shows annual dividends projected from $1000 invested in each of 10 stocks with the top yields in the five subject indices (a total of 50 stock investments). The chart plots projected yields as of a specific purchase date near the middle of each month going back to October. Projected yield increases or levelings were most frequent as average stock prices fell within each index. Bull market reversals in two indices forced yields down as recent prices increased. There is an unexplained contradiction in the Contenders chart in which both price and dividends went south.
Relative yield strengths differentiate the indices on the graph. The Carnevale Power Index shows lower yields with nearly identical downward trajectory as the Fish Champions and Contenders. The CCC Combination Index and Contenders declare the highest yields and the greatest rate of increase during the past month.
Projected dividend yield amounts from these five indexes over the past three months point to five distinct yield levels.
These five indices have been ranked for risk as of December 30, 2011, 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. Lesser divergence between dividend amounts above single share prices reveals the indexes with lesser risk. Stocks determined to be showing less risk of default than the sovereign U.S. government have shown negative divergence.
By that baseline standard of divergence, these five indexes rank themselves as follows:
These five indices and their component stocks have ongoing stories to tell. These graphs and lists will be updated again for publication following a review of each index in late January and thereafter.
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. 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.