Dogs Of The Dow After January: Buy Intel Instead Of Procter & Gamble To Make 17.83% More By 2017

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Includes: AAPL, AXP, BA, CAT, CSCO, CVX, IBM, INTC, JPM, MRK, PFE, PG, UNH, UTX, VZ, XOM
by: Fredrik Arnold

Summary

Ten Dow dog yields averaged 4.13% per indexArb.com or 4.04% per Yahoo.com Jan. 29. Top 11 were: INTC (or PG), CSCO, BA, MRK, XOM, PFE, IBM, VZ, CAT, and CVX.

IndexArb projected a mixed up signal for top 10 Dow Jan. 29 dogs. Yahoo Finance saw dividend rise as price dropped to report a retreating bear signal.

Analyst one-year targets disclosed upsides ranging from 18.41% to 38.69% and one showed 5% downside. Net gains for the top 10 ranged from 19.66% to 38.98%.

Top net gainers were AAPL, PFE, MRK, CSCO, UNH, BA, AXP, GS NKE, and CVX. Consider these stocks points of reference for your February dividend investment investigations.

Dow stocks by yield showed 2.01% or 26.02% more net gain from $5k invested in lowest priced five than from the same investment in all 10 top yielders.

How Now Dow 30?

Yield (dividend/price) results from indexArb.com and Yahoo.com for 30 Dow industrial stocks as of market closing prices January 29 led to the actionable conclusions detailed below.

Investors have utilized Michael B. O'Higgins dividend dog ranking system to select portfolios of five or ten stocks in the Dow Index to trade as of the last day in December since 1991, when he wrote the book Beating The Dow (HarperCollins). Thereafter dog investors awaited annual results from their investments in the lowest priced, highest yielding stocks and trusted that the price of every stock they now owned would climb higher (having locked in a high yield percentage at purchase).

Now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Incorporating analyst price upside estimates into the dog analysis has expanded the dog stock selection process to include popular growth equities, if so desired.

Investor Empowerment from Dow Dogs

McGraw Hill Financial, publisher of this index, states: "The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average™ and Dow Jones Utility Average™.

While stock selection is not governed by quantitative rules, a stock typically is added to The Dow® only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the indices is also a consideration in the selection process."

Dog Metrics Rated Dow Stocks Two Ways by Yield

Top ten Dow dogs by yield from IndexArb.com after December included seven of nine business sectors: basic materials (2); conglomerates (1); technology (3); healthcare (2); industrial goods (1); consumer goods (1). (Financials and services did not make the top ten and Dow-Jones rates Utilities in a separate index.)

IndexArb describes their dividend estimating strategy thus: "The "Estimated Dividend" for each stock below is our best estimate of the per share amount that will be paid during the next year, beginning on Jan-31-2016. Most companies pay dividends on a quarterly frequency; some pay annually or semi-annually. The amount, timing, and growth of each dividend is forecasted from several years of dividend history, provided, of course, that the company has an established track record. Otherwise, the most recent (perceived) dividend policy is extended."

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Top ten Dow dogs by yield from Yahoo.com/Finance after December lost one in the consumer goods sector to add one in technology. So unlike IndexArb, with seven sectors represented, Yahoo tallied six of nine: two basic materials firms, one conglomerate, four technology firms, two healthcare, and one industrial goods firm. (In the yahoo scheme Financials, consumer goods, and services did not make the top ten and Dow has Utilities in its separate index.)

It is safe to describe all the Yahoo Finance dividend estimates as "the most recent (perceived) dividend policy... extended."

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Both IndexArb.com and Yahoo.com in January, put the top five firms in the same order. Chevron Corp. (NYSE:CVX) [1] showed the best dividend yield as of market close January 29. A single conglomerate placed second, Caterpillar Inc. (NYSE:CAT) [2] per both ranking schemes.

Technology firms placed third and fourth, Verizon (NYSE:VZ) [3], and International Business Machines (NYSE:IBM) [4]. The first of two health firms, was fifth in both schemes, Pfizer Inc. (NYSE:PFE) [5].

Slots six through nine were occupied by four firms in unrelated order. IndexArb showed Cisco Systems (NASDAQ:CSCO)[6][9] in sixth, while Yahoo had it ninth. In the Index Arb list, Exxon Mobil Corp (NYSE:XOM) [7][6] placed seventh while Yahoo pegged it sixth. The other health firm, Merck (NYSE:MRK) [7][8] was eighth per IndexArb but seventh per Yahoo. The lone industrial goods firm, Boeing (NYSE:BA) [8][9] was ninth in the Index Arb list but eighth per Yahoo.

In January slot ten changed the balance of the two lists. IndexArb put Procter & Gamble [10](NYSE:PG) there. However Yahoo had the technology sector representative Intel Corp (NASDAQ:INTC) [10] in tenth to complete the dual, January IndexArb/Yahoo, top ten Dow dividend dog lists.

Dividend Vs. Price Results for Dow Top 10

Relative strength by yield for the top ten Dow industrial index stocks was graphed below. Ten periods of historic projected annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks and the total single share price of those ten stocks created the data points for each period shown in blue for dividend and green for price.

Actionable Conclusions: Dow Top Dogs (1) Mixed Up Through January per IndexArb, and (2) Retreated Bearishly per Yahoo!

IndexArb Dow dogs mixed up as projected annual dividend from $10k invested as $1K in each of the top ten increased 5% since December. At the same time the IndexArb Dow single share price also increased 7.5% to make the mixed up signal. (All because PG, with its $50 greater single share price, is in the tenth slot instead of INTC.)

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Yahoo projected a retreating scenario as their Dow dog line-up, showed a 5.4% higher annual dividend from $10k invested as $1K in each of the top ten, while the aggregate single share price for those ten fell 2.6% between December 28 and January 29.

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The differences between the IndexArb and the Yahoo chart peaks and valleys over time have been caused by the movement of high price stocks with large dividends in and out of the top ten. For example, in November the variation circled around a dogfight for ninth and tenth places. Variations in share price and annual dividends for General Electric Company at about $30/$1 held price and Coca Cola Co. at $42/$1.40 led to far lower prices on the IndexArb list. The Yahoo list, however, was pumped with Wal-Mart Stores at $60 /$2 and McDonald's $114/$3.56. So, the Yahoo price results were higher with dividends lower. This month, of course, we have PG with it's $50 higher share price in the tenth slot per IndexArb reckoning while lowly INTC occupies the tenth position in the Yahoo scheme.

Actionable Conclusion (3): Dow Dogs Are Overbought

The Dow dogs overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten) widened in January on the IndexArb chart while Yahoo Finance's graph narrowed the gap. The wider gap on the IndexArb graph is due to Procter & Gamble higher price and dividend in the mix instead of Intel place on the Yahoo chart. The January gap was estimated at $295 or 71.5% on IndexArb but $253 or 63% per Yahoo Finance.

This gap between high share price and low dividend per $1k invested shows an overbought condition. Meaning, no matter which chart you read, these are low risk and low opportunity Dow dogs. Until the Dow dividend from $10k invested as $1k in each of the top ten stocks exceeds the aggregate single share price of those stocks, market pressure continue on the Dow to shrink the gap.

(I invite you to sign on to my premium site, The Dividend Dog Catcher, to share my discussion about how the Dow (short of tossing out IBM) could return to a "normal" balance where dividends from 10 $1k investments can again exceed the aggregate single share price of those ten stocks.)

Actionable Conclusions: (4): Wall St. Wizards Forecast A 14.13% Average Upside & (5) A 10.98% Average Net Gain from All 30 Dow Dogs By January 2017

All thirty dogs from the Dow 30 Industrials were graphed below to show relative strengths by dividend and price as of January 29, 2016 and those projected by analyst mean price target estimates to the same date in 2017.

A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2017.

Historic prices and actual dividends paid from $30,000 invested as $1k in each of the stocks and the aggregate single share prices of those thirty stocks divided by 3 created data points for 2016. Projections based on estimated increases in dividend amounts from $1000 invested in the thirty Dow stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points green for price and blue for dividend.

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Analysts reported by Yahoo projected an 11% lower dividend from $10K invested as $1k in each dog of this group while aggregate single share price was projected to increase nearly 13.6% in the coming year. With price still projected higher than dividend, the analysts predicted Dow dogs extending their overbought condition one year out. (Personally, I think these dogs are still prime for a 25% market correction.)

The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the chart. Three to nine analysts have historically provided the more accurate estimates.

A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposed to the market direction.

Actionable Conclusions: (6) Analysts Allege 10 Dow Upsides Of 18.4% to 38.7%,

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Actionable Conclusion (7): Ten Dow Dividend Dogs Go After 19.66% to 38,98% Net Gains After December 2016

Four of the top yielding dividend Dow dogs were also verified as top gainers for the coming year by analyst 1 year target prices. So, this month, the dog strategy as graded by wall street analysts was 40% accurate.

Ten probable profit generating trades from $1k invested in each as revealed by IndexARB.com data by 2017 were:

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Apple Inc. (NASDAQ:AAPL) was projected to net $389.80 based on a median target price estimate from forty-one analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 6% more than the market as a whole.

Cisco Systems was projected to net $300.72 based on dividends plus a median target price estimate from thirty analysts less broker fees. The Beta number showed this estimate subject to volatility 6% more than the market as a whole.

Pfizer Inc. was projected to net $298.47 based on dividends plus the median of annual price estimates from sixteen analysts less broker fees. The Beta number showed this estimate subject to volatility 7% more than the market as a whole.

Boeing Company was projected to net $277.43 based on dividends plus a median target price estimate derived from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 5% more than the market as a whole.

Intel Corp was projected to net $238.54 based on dividends plus a median target price estimate from thirty-nine analysts less broker fees. The Beta number showed this estimate subject to volatility 14% less than the market as a whole.

American Express Co. (NYSE:AXP) was projected to net $237.01 based on a median target price estimate from twenty-two analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 11% less than the market as a whole.

JPMorgan Chase & Co (NYSE:JPM) was projected to net $222.18, based on dividends plus a median target price estimate by twenty-seven analysts plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 16% more than the market as a whole.

United Health Group Inc. (NYSE:UNH) was projected to net $215.41 based on target estimates from twenty-three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 43% less than the market as a whole.

Merck & Co. was projected to net $200.64 based on estimates from nineteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 24% less than the market as a whole.

United Technologies (NYSE:UTX) was projected to net $196.56, based on dividend plus median target price estimates from seventeen analysts less broker fees. The Beta number showed this estimate subject to volatility 16% greater than the market as a whole.

The average net gain in dividend and price less fees was over 25.7% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 4% less than the market as a whole.

5 Small Dogs Of The Dow Showed 2.01% More January Gains per IndexArb, Or 26.02% More per Yahoo, from $5K Invested than From The Same Investment In All Ten Dogs.

This 17.83% Higher Predicted Return for Yahoo Came From INTC Instead Of CAT In The 5 per IndexArb

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Top ten Dow dogs by yield from IndexArb.com/Finance after December tallied stocks from six of nine sectors: two basic materials firms, one conglomerate, three technology firms, two healthcare concerns, one industrial goods and plus and one consumer goods firm.

Five Lowest Price High Yield Dow Dogs (1) Delivered 17.78% VS. 17.41% Net Gains by All Ten by January 29, 2017 per IndexArb

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$5000 invested as $1k in each of the five Lowest priced stocks in the top ten dogs of the Dow kennel by yield were predicted by analyst 1 year targets to deliver 2.01% more net gain than the same amount invested in all ten. The very lowest priced top ten dog of the Dow, Cisco Systems , was projected to deliver the best net gain of 30.07%.

Lowest priced five dogs of the Dow stocks for January 29 were: Cisco Systems; Pfizer Inc.; Verizon Communications; Merck & Co.; Caterpillar Inc., with prices ranging from $23.79 to $62.24.

Higher priced five Dow dividend dogs per IndexArb for January 29 were: Exxon Mobil Corp.; Procter & Gamble; Chevron Corp.; Boeing Company; International Business Machines, whose prices ranged from $77.85 to $124.79.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow.

Small Dogs January Gains per Yahoo

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Top ten Dow dogs by yield from Yahoo.com/Finance after November tallied stocks from five of nine sectors: two basic materials firms, one conglomerate, four technology firms, two healthcare concerns, and one industrial goods firm.

Five Lowest Price High Yield Dow Dogs Delivered 21.61% VS. 17.15% Net Gains by All Ten by January 29, 2017 per Yahoo

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$5000 invested as $1k in each of the five Lowest priced stocks in the top ten dogs of the Dow kennel by yield were predicted by analyst 1 year targets to deliver 26.02% more net gain than the same amount invested in all ten. The second lowest priced top ten dog of the Dow, Pfizer Inc. , was projected to deliver the best net gain of 29.85%.

Lowest priced five dogs of the Dow stocks for January 29 were: Cisco Systems; Pfizer Inc.; Intel Corp.; Verizon Communications; Merck & Co., with prices ranging from $23.79 to $50.67.

Higher priced five Dow dividend dogs per Yahoo for January 29 were: Caterpillar Inc.; Exxon Mobil Corp.; Chevron Corp.; Boeing Company; International Business Machines, whose prices ranged from $62.24 to $124.79.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow.

The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. Its also the work analysts got paid big bucks to do.

A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The stocks listed above were suggested only as reference points for a Dow Industrial equities dog dividend stock investment research process in February, 2016. These were not recommendations.

(See my instablog for specific instructions about how to best apply the dividend dog data featured in this article.)

Gains/declines as reported do not factor-in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

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

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from Dividend.com; Yahoo Finance; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: I am/we are long CSCO, INTC, PFE, VZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.