Dogs Of The Dow Dividend Dither For February

Includes: CAT, DD, INTC, MSFT, PG, T
by: Fredrik Arnold

The best dividend stocks are sought by some investors using a once per year trading system triggered by yield, called the "Dogs of the Index". This strategy gives investors the tactical advantage of obtaining all the wisdom and knowledge of well-paid wizards of investment, published for free, merely by choosing an existing collection of equities built by those experts.

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. Charts below display a snapshot of the Dow Index as of February 10, 2012.

Two key metrics determine the yields that rank the Dow 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, the investor is able to follow, trade, and await the results from an investment in the lowest priced, highest yielding five or ten stocks in the index.

Investment empowerment from the Dow 30.

Listed below are the thirty Dow Index stocks by yield as of 2/10/12 per data. CME Group, publisher if this index, states:

The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. indexes, such as the S&P 500 Index providing additional opportunities.

Three technology firms paying the biggest dividends on the Dow in February were: (1) AT&T (NYSE:T), (2) Verizon (NYSE:VZ) and (3) Intel (NASDAQ:INTC). As it has for the past year, AT&T continues atop this list. The rest of the Dow dogs include three healthcare, one industrial, one consumer and two basic materials. Thirty Dow stocks include seven technology companies, three consumer goods, four financial, four services, four basic materials, two industrial, three health care, no utilities, and three conglomerates representing the market sectors.

Vertical moves by Dow index dividend payers

Colors on the charts below reveal: (Yellow) firms listed in first position at least once between October 2011 and February 2012; (Cyan Blue) firms listed in tenth position at least once between October 2011 and February 2012; (Magenta) firms listed in twentieth position at least once between October 2011 and February 2012; (Green) firms listed in thirtieth position at least once between October 2011 and February 2012. Duplicates are depicted in color for highest ranking attained.

Click on charts below to enlarge:

Notice how annual divided projections for this index in February differ from Yahoo projections at the end of December. Here are a few to watch outside of AT&T (T) at the top: Dupont (NYSE:DD) increased 11.7% in price, with no change in February dividends. Proctor & Gamble (NYSE:PG) dropped 4.2% in price and dropped 4.8% in dividend projections in February. Microsoft (NASDAQ:MSFT) increased 17.5% in price and increased 10% in dividends. Caterpillar (NYSE:CAT) increased 23.3% in price and increased 6.5% in dividends using data.

Dividend VS. Price Results for Dow Index Top 10

Below is a graph of the relative strengths of the top ten Dow index stocks by yield as of February 10, 2012. Four months of historic projected annual dividend history from $1000 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.

The Dow Index component February update shows bull market tendencies exhibited over the past four months that culminated in divergence, as dividends from $1k invested in the top ten rose slightly while aggregate total single share prices increased at a higher rate.

The bull market has pushed Dow aggregate single share prices for the top ten stocks by yield beyond the annual projected dividend total from $1000 invested in each. That action repeats a pattern exhibited in January and February 2011. Will divergence continue or intersection reoccur as it did last March?

Stay tuned.

Disclosure: I am long (T), (VZ), (NYSE:JNJ), (INTC), (NYSE:CVX).

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.