SFL Leads Strategic Dividend Dogs To Show Dow How To Spring Forward

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Includes: ADM, AGU, AMGN, AMP, ARCC, CMI, GM, IP, IVZ, JCI, JNS, KSS, LYB, MDC, MDP, PUK, RF, SFL, SPLS, VLO
by: Fredrik Arnold

Summary

Miller/Howard Investments (M/H) of Woodstock, New York started their Strategic Dividend Index in July, 2014 and updates it quarterly. Recent components were posted in a March 28, 2016 rebalancing.

M/H Strategic Dividend Index (SDI) selection criteria: (1) Dividend yield; (2) Asset valuation; (3) Profitability; (4) Estimated growth of yield; (5) Momentum.

30 SDI stocks ranged in yield from 2.42% to 12.96% as of March 31. VLO, PUK, AGU, MDP, IP, KSS, SPS, GM, ARCC, and SFL showed top yields to 2017.

Thirty SDI upsides averaged 9.39% with net gains 10.56% per 1yr. targets. LYB, VLO, IVZ, JCI, AMP, GM, AMGN, RF, PUK, and SFL led gains to 2017. Three showed downsides.

$5k invested in lowest-priced five M/H-SDI Dogs showed 63.53% more gain than from $5k invested in all ten top-yield stocks. Use this to guide your April to June SDI research.

Processing M/H SDI Dogs

Yield (dividend/price) results from here verified by Yahoo Finance for ten stocks from four of nine Yahoo Finance sectors as of market closing prices March 31, revealed the actionable conclusions discussed below. Miller/Howard Investments, publisher of the index states:

"The Miller/Howard Strategic Dividend Index (MHDT) seeks to capture and distill all we have learned over nearly a quarter century of active management of dividend companies. Our strategic, rules-based index is created to enhance current passive approaches to asset allocation, going beyond market exposure by applying persistent, strategic factors we have observed and confirmed through our active management. We seek to find and retain the "good," as opposed to cap-weighted indexes, which in our view hold the good, the bad, and the ugly - by their very nature and definition."

The Current Strategic Dividend Index List

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"The Miller/Howard Strategic Dividend Index is a composite of 30 publicly traded equities that provide above-average dividend yields and dividend growth, and are equal weighted based on certain quantitative fundamental factors."

Actionable Conclusion (1) Dog Metrics Singled Out 10 Top Strategic Dividend Index Stocks By Yield Led by SFL

Top ten Miller/Howard Strategic Dividend Index dogs showing the biggest dividend yields as of March 31, 2015, represented four of nine sectors: (1) services [4 listed]; (2) financials [2 listed]; (3) consumer goods [2 listed]; (4) basic materials [2 listed].

Top M/H SDI stock by yield, Ship Finance International Ltd. (NYSE:SFL) [1] was the best of four service firms listed. The other three placed fourth, fifth, and seventh: Staples Inc. (NASDAQ:SPLS) [4]; Kohl's Corp. (NYSE:KSS) [5]; Meredith Corp. (NYSE:MDP) [7].

Two financials filled the Strategic Dividend Index second, and ninth slots by yield: Ares Capital Corp. (NASDAQ:ARCC) [2], Prudential PLC (PUC) [9].

Two consumer goods firms placed third, and sixth by yield: General Motors Co. (NYSE:GM) [3], and International Paper Co. (NYSE:IP) [6].

Finally, two basic materials firms placed eighth, and tenth: Agrium Inc. (NYSE:AGU) [8], and Valero Energy Corp. (NYSE:VLO) [10] to complete the top ten Spring quarterly M/H SDI dogs by yield.

Ten M/H SDI Top Dividend Vs. Price Results Compared To Dow Dogs

Graphs below compared relative strengths of the top ten M/H SDI dogs by yield as of market close 3/31/2016 with those of the Dow industrials index. Annual dividend history from $10,000 invested as $1k in each of the ten highest-yielding stocks along with the total single share price of those ten stocks made the data points shown in green for price and blue for dividends.

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Actionable Conclusion (2): M/H SDI Retreated To Regroup As Dow Dogs Charged Recklessly Into Spring

M/H SDI top ten index fell back most bearishly after both the December and March quarterly rebalances. Dividend from $10k invested as $1k in each of the top ten stocks soared while aggregate single share price of the top ten plummeted. Since December, dividend derived from $10K invested as $1k in each top dog flew skyward at a rate of 18% to end the winter quarter while aggregate single share price of those ten stocks dropped 19% for the period.

March 2015, M/H SDI top ten index dogs were within $13 of being equal aggregate single share price paid and dividends earned from $10k invested as $1k in each. The September index showed itself as very overbought (like the Dow) with price exceeding dividend by $220 or 55%. In December, the vectors for price and dividend were back within $10 of each other. The March rebalance brought the M/H SDI to an "optimal" state of dividend greater than price.

Meanwhile, Dow dogs charged onward. They fell 1.8% in estimated annual dividend from $10k invested as $1k in each of the top ten since December while aggregate single share price soared 14.7% to finish the winter quarter.

As a result, the Dow dogs' overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k each in those ten) expanded beyond its record September gap.

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Actionable Conclusion (3): Dow Dogs Remain Overbought

Historically, the overhang was $179 or 49% for June 2014; widened to $239 or 65% in September 2014; narrowed to $198 or 50% in December 2014; gapped wider to a record $283 or 77% come March, 2015; and narrowed a bit to $278 or 75% in June. September 2015 saw the gap widen to $331 or 84%. December posted a gap of $292 or 75%. March 2016 brought the Dow overprice metric to $399 or 104%.

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. The Dow top ten average price per dollar of annual dividend was $26.30.

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Conversely, the Miller/Howard Strategic Dividend Index chart shows their list to be now composed of lower risk and higher opportunity M/H SDI pups.

In contrast to the Dow, M/H SDI Dog top ten average price per dollar of annual dividend came in at a lower $21.54 as of March 31. That's almost a third lower priced than an annual dollar of Dow dividend.

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Actionable Conclusions: (4) Ten M/H SDI Dogs Displayed 11% To 47% Upsides, While (5) Three Augured 4.31% To 12.68% Downsides To March, 2017

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To quantify top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential. Added to the simple high-yield "dog" metrics, analyst mean price target estimates provided another tool to dig out bargains.

Actionable Conclusions: Wall St. Wizards Willed (6) A 9.39% Average Median Target Price Upside For 30 Miller/Howard SDI Upside Dogs Come March 2017

Miller/Howard SDI stocks were graphed below to show relative strengths by dividend and price as of March 31, 2016, and those projected by analyst mean price target estimates to the same date in 2017.

A hypothetical $1,000 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 gauged the stock price upsides and net gains including dividends, less broker fees, as of 2016.

Historic prices and actual dividends paid from $10,000 invested as $1k in each of the stocks and the aggregate single share prices of those ten stocks created data points for 2016. Projections based on estimated dividend amounts from $1,000 invested in the ten stocks and aggregate 1-year analyst target share prices from Yahoo Finance created the 2017 data points green for price and blue for dividend.

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Yahoo analysts' median 1-year targets projected an 8.9% lower dividend from $10k invested as $1k in ten dogs in this group while aggregate single share price for those ten was projected to increase by 7.3% in the coming year. Notice, price exceeding dividend in the coming year forecasts a return to an overbought condition for the Miller/Howard SDI top yield dogs.

The number of analysts contributing to the target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).

A beta (risk) ranking for each stock was provided in the far right column of 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's movement opposite of market direction.

Actionable Conclusion (7): Analysts Asserted 12.65% To 49% Net Gains For Ten Miller/Howard SDI Dogs By April 2017

Four of ten top dividend-yielding Miller/Howard SDI dogs were verified as being among the top ten of thirty gainers for the coming year based on analyst 1-year target prices. So this quarter the dog strategy for the Miller/Howard SDI as graded by Wall St. wizards was 40% accurate.

Ten probable profit-generating trades were revealed in Yahoo Finance for March 2017:

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Prudential PLC (NYSE:PUK) was projected to net $489.95, based on dividends, plus mean target price estimates from two analysts, less broker fees. The Beta number showed this estimate subject to volatility 60% more than the market as a whole.

Ship Finance International was projected to net $405.49, based on dividends, plus the mean of annual price estimates from five analysts, less broker fees. The Beta number showed this estimate subject to volatility 33% greater than the market as a whole.

Regions Financial Corp. (NYSE:RF) was projected to net $284.46, based on dividends, plus mean target price estimates from thirty analysts, less broker fees. The Beta number showed this estimate subject to volatility 21% greater than the market as a whole.

Amgen Inc. (NASDAQ:AMGN) was projected to net $240.59, based on dividends, plus a mean target price estimate from seventeen analysts, less broker fees. The Beta number showed this estimate subject to volatility 35% more than the market as a whole.

General Motors Co. was projected to net $237.40, based on dividends, plus a mean target price estimate from seventeen analysts, less broker fees. The Beta number showed this estimate subject to volatility 66% more than the market as a whole.

Ameriprise Financial Inc. (NYSE:AMP) was projected to net $231.78, based on dividends, plus mean target price estimates from ten analysts, less broker fees. The Beta number showed this estimate subject to volatility 62% greater than the market as a whole.

Johnson Controls Inc. (NYSE:JCI) was projected to net $190.16, based on a median target price estimate from sixteen analysts, combined with projected annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 73% more than the market as a whole.

Invesco Ltd. (NYSE:IVZ) was projected to net $185.07, based on dividends, plus mean target price estimates from fifteen analysts, less broker fees. The Beta number showed this estimate subject to volatility 60% more than the market as a whole.

Valero Energy Corp. (NYSE:ADM) was projected to net $155.55, based on a mean target price estimate from fifteen analysts, combined with projected annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 9% more than the market as a whole.

LyondellBasell Industries (NYSE:LYB) was projected to net $126.53 based on dividends, plus mean target price estimates by nineteen analysts, less broker fees. The Beta number showed this estimate subject to volatility 3% more than the market as a whole.

Average net gain in dividend and price was estimated at 25.47% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 42% more than the market as a whole.

Actionable Conclusion (8): (Bear Alerts) Analysts Predicted Three M/H SDI Dogs Would Average A Net Loss of 6.73% By March 2017

Three probable losing trades revealed by Yahoo Finance for 2017 were:

M/HSDI[UG] (4) 3LOSERS MAR '16-'17

Janus Capital Group Inc. (NYSE:JNS) was projected to lose $38.46 based on dividend and a median target price estimate from ten analysts including $20 of broker fees (which the dividend covered). The Beta number showed this estimate subject to volatility 39% more than the market as a whole.

Meredith Corp. (NYSE:MDC) was projected to lose $52.00 based on dividend and a median target price estimate from five analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 1% less than the market as a whole.

Cummins Inc. (NYSE:CMI) was projected to lose $111.32 based on dividend from nineteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 1% more than the market as a whole.

The average net loss in dividend and price with broker fees included was 6.73% on $3k invested as $1k in each of these three dogs. The beta number showed this estimate subject to volatility 13% more than the market as a whole.

63.53% Edge For 5 Highest Yield, Lowest Priced Strategic Index Stocks In Spring Quarter

Dog Metrics Extracted Bargains

Ten Miller/Howard Strategic Dividend Index equities were culled by yield from the eighth quarterly update from here. Yield (dividend/price) results verified by Yahoo Finance did the ranking.

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As noted above, top ten Miller/Howard Strategic Dividend Index dogs showing the highest dividend yields as of March 31, 2016, represented four of nine sectors: (1) services [4 listed]; (2) financials [2 listed]; (3) consumer goods [2 listed]; (4) basic materials [2 listed].

Actionable Conclusions: (9) Analysts Believe 5 Lowest-Priced of the Top Ten Highest-Yield Strategic Dividend Index Dogs Will Deliver 28.1% Vs. (10) 17.18% Net Gains by All Ten by March 31, 2017

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$5000 invested as $1k in each of the five lowest-priced stocks in the top ten M/H SDI kennel by yield were predicted by analyst 1-year targets to deliver 63.53% more net gain than $5,000 invested as $0.5k in each of all ten. The fifth-lowest priced M/H SDI dividend dog, Prudential PLC, was projected to deliver the best net gain of 48.99%.

The five lowest-priced M/H SDI dividend dogs for March 31 were: Staples Inc.; Ship Finance International Ltd. ; Ares Capital Corp.; General Motors Co.; Prudential PLC, with prices ranging from $11.03 to $37.20.

Five higher-priced M/H SDI dividend dogs for March 31 were: International Paper Co.; Kohl's Corp.; Meredith Corp.; Valero Energy Corp.; and Agrium Inc., whose prices ranged from $41.04 to $88.29.

That distinction between the five low-priced dividend dogs and the general field of ten reflected Michael B. O'Higgins' "basic method" for beating the Dow. The scale of projected gains based on analyst targets added 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. Caution is advised, since analysts are historically only 20% to 80% accurate on the direction of change and just 0% to 20% accurate on the degree of change.

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

The net gain/loss estimates above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.

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Stocks listed above were suggested only as possible reference points for your M/H SDI index dog dividend stock purchase or sale research process. These were not recommendations.

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 www.indexarb.com; www.dividend.com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: I am/we are long CSCO, 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.