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Last week David Fish published his Dividend Challengers: Smackdown XXII on Seeking Alpha. He defines Challengers as "companies that have paid higher dividends for 5-9 years." This article utilizes the dogs of the index strategy to sort David's Top 10 Challengers as of January 13 into a suitable grouping of 10 to trade.

The aim of this article is to help answer the question, "which dividend stocks are good, better, best, bad or ugly?" This article also aims to provide 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."

The Dogs of the Index Strategy

Two key metrics determine the yields that rank 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. Investors select portfolios of five or 10 stocks in any one index 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 (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.

Classic Dogs of the Index theory trades selected Dow stocks at the start of the trading year. Thus, the Dow is used as a standard of comparison to conclude this piece.

Comparative Methods Used

First, David Fish's Challengers list (from here) as of December 30, showing 202 companies paying increasing dividends for 5 - 9 years is updated with pricing information from Yahoo Finance as of January 13, then sorted by yield to reveal the top 30 stocks. Market performance of these 30 selections is then reviewed using four months of historic projected annual dividend history.

To conclude, this article assesses the relative strengths of David Fish's Top 10 Dividend Challengers vs. the Dogs of the Dow January stock list. Annual dividends from $1000 invested in the 10 highest-yielding stocks in each index versus the aggregate single share prices of the top 10 stocks in each index provide a measure of risk.

Top Dividend Challengers

(Click charts to enlarge)

Mr. Fish's top 10 Challenger stocks paying the biggest dividends for January include firms representing four of nine market sectors. The top stock Dynex Capital Inc. (NYSE:DX) is one of five in the financial sector. The balance of the top 10 include one consumer, one technology, four financial and three 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, one technology and no conglomerates representing the market sectors.

Vertical Moves of Dividend Challenger Stocks

Going back four months, three financial sector equities Triangle Capital Corp. (NYSE:TCAP), PennantPark Investment Corp. (NASDAQ:PNNT), and now Dynex Capital Inc. have claimed the top of this list by yield. One technology sector stock Telefonica S.A. (NYSE:TEF) also briefly held the top but failed to raise its dividend so was dropped from the list as of December 30, 2011.

The lower middle of the list shows just as much activity as at the top. A sizable price gain was made by oil & gas pipeline company Targa Resource Partners (NYSE:NGLS) in the past three months moving from 19th place by yield to 25th by virtue of a price gain from $35.26 to $39.66 or 12.5%. Also Health Care REIT (NYSE:HCN) moved from the 26th slot by yield to twenty-eighth as it gained in price from $48.13 to $55.53 or 15.4% over four months. Conversely AmeriGas Partners LP (NYSE:APU) lost value moving from twenty-first place by yield at $45.92 to thirteenth place dropping to $41.18 (11.5%) over four months. Also Cheviot Financial Corp. (NASDAQ:CHEV) improved in yield rankings as its stock price moved from $8.50 to $7.33 between October and January.

Color code shows: (Yellow) firms listed in first position at least once between between October 2011 and January 2012; (Cyan Blue) firms listed in tenth position at least once between October 2011 and January 2012; (Magenta) firms listed in twentieth position at least once between October 2011 and January 2012; (Green) firms listed in thirtieth position at least once between October 2011 and January 2012. Duplicates are depicted in color for highest ranking attained.

January Dividend vs. Price Gap for Fish Challengers vs. Dow

Below are graphs of the relative strengths of the top 10 Fish Dividend Challengers index stocks by yield and price from October to January to those of the Dow. Using four months of historic projected annual dividend history from $1000 invested in the 10 highest yielding stocks each month and the aggregate single share prices of those 10 stocks creates the data points for each month shown in green for price and blue for dividends.

Conclusion: A Hard Charging Team of Dogs to Run

This Challengers collection of 30 versatile dividend payers shows slightly sinking dividends as their aggregate single share prices made a bow shaped curve. The Dow index on the other hand exhibited near convergence as dividends from $1k invested in the top 10 decreased while aggregate total single share prices rose over the past four months. The Challengers index currently pays 123.9% higher dividends from an aggregate single share price 32% lower than that of the Dow

At the end of each month, two summaries conclude this new series of articles showing comparative results of yield and price for six indices: Carnevale Power 25; Fish Dividend Champions; Contenders; Challengers; Dow 30 Index.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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, unless noted otherwise, are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

Source: Top Dividend Challengers Vs. Dogs Of The Dow In January