Sizing Up The Utilities Sector's January Dogs

by: Fredrik Arnold

A month ago your intrepid Dogs of the Index analyst began applying dog dividend methodology to each of eight major market sectors: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

The ninth sector, conglomerates, according to Yahoo Finance, contains just eight firms, five of which pay dividends. Thus I declined to apply dogs of the index metrics to such a limited universe of conglomerates, declaring, "such a task is comparable to a dog show judge trying to evaluate a Chihuahua based on St. Bernard conformation standards."

Dogs of the Index Metrics Used to Select The Top Ten Sector Stocks

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 ten 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.

Comparative Methods Used

First, the entire list of utilities sector companies is sorted by yield as of January 20 using to reveal the top thirty. Market performance of these thirty selections is then reviewed using four months of historic projected annual dividend history from Yahoo Finance.

Thereafter, today's article goes on to assess the relative strengths of the utilities sector top ten dividend dogs as of January 20 vs. the Dogs of the Dow January 13 stock list. Annual dividends from $1,000 invested in the ten highest yielding stocks in the sector and index are compared to the aggregate single share prices of the top ten stocks in the sector and index.

Utilities Dividend Dogs

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The top ten utilities sector stocks paying the biggest dividends in January represent four industries. Top utilities sector stock, Niska (NYSE:NKA) is one of five gas utilities firms in the top ten. The other four are: Inergy (NRGY); Transportadora (NYSE:TGS); Suburban Propane (NYSE:SPH); Amerigas (NYSE:APU). One electric utility is listed at number four on the list is Atlantic Power (NYSE:AT). The four remaining utilities in the top ten include two diversified utilities, Endesa (NYSE:EOC), and TransAlta (NYSE:TAC); two remaining foreign utilities are: CPFL Energia (NYSE:CPL); Companhia Energetica (NYSE:CIG).

Of the top thirty utilities sector stocks by yield, twelve firms are in the Electric Utilities industry. Other utilities sector industries represented by more than one firm are: Diversified Utilities, with nine; Gas Utilities, with eight. Foreign Utilities lists two industry representatives (though at least six of the thirty listed are located outside North America.

Vertical Moves in Utilities Dividend Dog Stocks

Going back four months, NKA claimed the top of this list by yield in October and stayed there into January. The action throughout the utilities list is neutral to somewhat bearish. A notable exception, however, is made by Huanang Power (NYSE:HNP) an electric utility in China. From October to December HNP moved from sixth place by yield to thirteenth by virtue of a market price increase from $16.35 to $21.02 per share for the period, a 28.6% gain. In January HNP slipped lower in yield down to twenty-eighth at $23.73 for a 12.9% price gain in a month. It's hard to pick the biggest loser in utilities but one is Exelon Corporation (NYSE:EXC), whose price slid from $43.31 in October to $39.36 in January for a 10.04% decline over four months.

Color code shows: (Yellow) firms listed in first position at least once 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.

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Dividend vs. Price Results for Utilities Sector vs. Dow Dogs

Below is a graph of the relative strengths of the top ten utilities sector dividend stocks by yield as of January 20, 2012 compared to those of the Dow. Using four months of historic projected annual dividend history from $1,000 invested in the ten highest yielding stocks each month and the total single share prices of those ten stocks creates the data points for each month shown in green for price and blue for dividends.

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Conclusion: The Non-Sporting Dogs Lay Down

This utilities collection of 30 dividend payers show declining prices resulting in higher dividend projections into the first month of 2012. There was a 4.04% drop in aggregate single share prices for these top ten utilities over the four monthly points surveyed. Dividends from $1,000 invested in each of the top ten increased 9.056% for the period.

Meanwhile, the Dow index moved to within $3.50 of convergence as dividends from $1,000 invested in the top ten nearly overlapped aggregate total single share prices in January. The utilities sector top ten show $339 more projected annual dividends returned from $1,000 invested in each on the top ten stocks at more than a $138 lower aggregate ten share price than the Dow as of January 20.

At the end of each month, two summaries will conclude this new series of articles by showing comparative results of yield and price for all eight sectors reported: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

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