This monthly series gauges relative investment risk in eight stock sectors. To show risk the gap between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten highest yielding stocks in an index or sector is measured against total prices of one share of each of those ten stocks in that same index or sector.
This is another attempt to respond to the question of which dividend stocks are good, better, best, bad or ugly. The effort also aims to heed Yale economics professor Robert Shiller's admonition: "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."
A once per year trading system triggered by yield, the Dogs of the Index strategy is the basis for this article and the risk gauge. The dogs strategy popularized by Michael B. O'Higgins in Beating The Dow (HarperCollins, 1991) reveals low yielding stocks whose prices increase (or whose dividends decrease) to be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index.
Two key metrics determine the yields that rank the 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. Thus investors, having selected their portfolios of five or ten stocks in any one index, are able to follow, trade, and await the results from their investments in the lowest priced, highest yielding stocks selected.
The investment risk tool is constructed on a given date in the following manner: (1) Add the single share prices of the top ten stocks on an index list. Then, (2) add the total annual dividend amounts projected from $1,000 invested in each of those ten stocks. Finally, (3) compare the resulting two numbers.
In this article the top ten stocks of the venerable Dow Industrials index, also known as the Dogs of the Dow provide a baseline for comparison of risk/reward.
Graphing Dividends vs. Price
Each graph below shows monthly points of comparison between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten high yield stocks (blue points) versus the total prices of one share of each of the ten stocks (green points) by sector or index. Grouped together the graphs display the comparative gyrations of the eight sectors against the Dow baseline index graph.
Annual Dividends from $1,000 Invested in 10 Stocks vs. Their Aggregate Single Share Prices
Stocks in each sector
The following charts display prices and projected annual dividends for ten stocks of each sector, surveyed January 20, 2012.
Basic Materials Dividend Dogs
Oil and gas firm TRU slid off the top 30 list in January based on a revised annual dividend forecast of $0.17 per share, leaving the top to the steel and iron company, Great Northern (NYSE:GNI). Only three of the top ten basic materials firms do not mention oil and gas in their industry description: Great Northern (GNI); Oxford (OXF); Rhino (NYSE:RNO). Unlike other sectors in which aggregate dividends increase when aggregate prices fall, the basic materials sector shows dividends and prices in lock step rising and falling together at the monthly points surveyed.
Consumer Goods Dividend Dogs
The top ten consumer goods stocks paying the biggest dividends in January represent five industries. Top stock Vector (NYSE:VGR) is one of three firms from the cigarettes industry. Business equipment, personal products, office supplies, textiles - apparel clothing, and auto parts categorize the rest. The January consumer goods collection of 10 top dividend payers shows steady horizontal market performance at the four monthly points surveyed.
Financial Sector Dividend Dogs
Top ten financial sector stocks paying the biggest dividends in January represent seven industries. Best yielding financial sector stock American Capital (NASDAQ:AGNC) is one of five REITs in the top ten. Five of the top ten financial firms are REITs. Three are Residential REITs, one is a Diversified REIT, and one a Retail REIT. January's financial collection of 10 top dividend payers shows general 19.5% market price decline over the four monthly points surveyed. Dividends from $1k invested in each of the top ten declined 6% for the period.
Healthcare Sector Dividend Dogs
Top ten healthcare sector stocks paying the largest dividends relative to price in January represent five industries. Top healthcare sector stock PDL BioPharma (NASDAQ:PDLI) is the only biotechnology firm in the top ten. Two (NeoStem (NBS), and Nordion (NYSE:NDZ)) are specialized health services firms. Three are major drug manufacturers. Two more are medical instruments & supplies firms. The remaining one is a medical laboratories and research firm. The healthcare January collection of 10 top dividend payers shows general 3.56% market price increase in aggregate single share prices over the four monthly points surveyed. Dividends from $1,000 invested in each of the top ten declined 6.69% for the period.
Industrial Goods Sector Dividend Dogs
Top ten industrial goods sector stocks by yield in January represent seven industries. Top industrial goods sector stock Veolia Environement (NYSE:VE) is one of three waste management firms in the top ten. The ten also include three residential construction firms. The remaining four are in metal fabrication; manufactured housing; aerospace & defense products & services; general contractors. January's industrial goods collection of 10 top dividend payers shows general 3.42% decrease in aggregate single share prices over the four monthly points surveyed. Dividends from $1,000 invested in each of the top ten declined 11.09% for the period.
Services Sector Dividend Dogs
Eight of the top ten services sector firms ranked by dividend yield are in the same Shipping industry group. Top services sector stock, CPI Corp. (NYSE:CPY) is the only personal services firm in the top ten. October's leader by yield, Alon Holdings (NYSE:BSI), the only Grocery Stores firm dropped to third place in January. Second place is held by Paragon (PRGN). This services collection of 10 top dividend payers shows depressed market performance into the first month of 2012. There was a 39.4% decrease in aggregate single share prices for the top ten over the four monthly points surveyed. Dividends from $1,000 invested in each of the top ten increased 38.24% for the period.
Technology Sector Dividend Dogs
Top technology sector stock, Cimitron (NASDAQ:CIMT) is the only technical and systems software firm in the top ten. IncrediMail (NASDAQ:PERI) at number two is the only business software & services firm listed. Six more industries are represented in the top ten: telecommunications services - domestic; telecommunications services - foreign; information technology services; wireless communications; diversified communications services; internet information providers. The ten top technology dividend payers for January show rising prices resulting in falling dividend projections into the first month of 2012. There was a 20.06% increase in aggregate single share prices for the top ten over the four monthly points surveyed. Dividends from $1,000 invested in each of the top ten decreased 8.58% for the period.
Utilities Sector Dividend Dogs
Top utilities sector stock, Niska (NYSE:NKA) is one of five gas utilities firms in the top ten. Two diversified utilities industry firms, two foreign utilities and one electric company constitute the balance of the top ten by yield. This utilities collection of 10 top 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.
The Baseline: Dogs of the Dow
Three of the top ten stocks paying the biggest dividends on the Dow for January are technology firms. AT&T (NYSE:T) tops this list. The remaining top ten Dow dividend payers include two consumer goods, no financial, no services, one basic materials, one industrial, three health care, no utilities, and no conglomerates representing the market sectors.
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.
A reader request to "add relative financial data on the companies selected" for a previous article comparing indices by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 5 or 10 Dogs of the Index stocks at any point during the year. Using The Dow Index as the baseline standard of divergence, the eight sectors surveyed above rank themselves in the following order from high to low risk in December:
This information will continue to be reviewed monthly as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes." These eight sectors and their component stocks have ongoing stories to tell. This graph and list of companies will be updated again for publication each month.
Disclosure: I am long T, VZ, JNJ, INTC.
Disclaimer: This article is for informational and educational purposes only and should 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.