Dow Index Analysts Say Leave CAT Out Of Your Small Dog Trades In May For 67.94% More Gain

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Includes: APPL, BA, CAT, CSCO, CVX, GE, GS, IBM, INTC, KO, MRK, MSFT, NKE, PFE, PG, UNH, V, VZ, WMT, XOM
by: Fredrik Arnold

Summary

Top 10 Dow dog yields averaged 3.76% per indexArb.com or 3.68% per YCharts.com April 25. Top 11 were: MRK (or PG); INTC; XOM; BA; PFE; IBM; CSCO; CAT; CVX; and VZ.

IndexArb projected a bullish charge. YCharts projected a mix down for top 10 Dow dogs. Analyst one-year targets disclosed 15.33% average upsides from top 10 while two averaged 11.2% downside.

Top 10 net gains from V, GE, UNH, GS, KO, PFE, MSFT, NKE, INTL, and AAPL ranged from 11.4% to 23.89%. WMT and CAT projected losses of 5.5% and 6.8%.

Dow stocks by yield showed 103.31% per indexArb or 54.04% more net gain per YCharts from $5k invested in the lowest-priced five than from the same investment in all 10.

How Do You Do Dow 30?

Yield (dividend/price) results from indexArb.com and YCharts.com for 30 Dow industrial stocks as of market closing prices April 25 led to the actionable conclusions detailed below.

Investors have utilized Michael B. O'Higgins' dividend dog ranking system to select portfolios of five or 10 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 Rate Dow Stocks Two Ways by Yield

Top 10 Dow dogs by yield from indexArb.com after March included five of nine business sectors: technology (4); basic materials (2); conglomerates (1); healthcare (2); and industrial goods (1). Financials, consumer goods, and services did not make the top 10, and Dow Jones rates utilities in a separate index).

IndexArb describes its 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 Apr-26-2016. 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 10 Dow dogs by yield from YCharts.com after March lost one in the healthcare sector to gain one in consumer goods. So unlike indexArb, with five sectors represented, Yahoo tallied six of nine: four technology firms, two basic materials firms, one conglomerate, one healthcare, one industrial goods firm, and one consumer goods (In the YCharts scheme, only financials and services did not make the top 10 since Dow always puts utilities in its separate index).

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

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Both indexArb.com and YCharts.com after March put the top four firms in the same order: Verizon (NYSE:VZ) [1], a technology firm, showed the best dividend yield as of market close April 25. Chevron Corp. (NYSE:CVX) [2], the big basic materials major oil firm, placed second. A single conglomerate placed third, Caterpillar, Inc. (NYSE:CAT) [3], and another technology firm placed fourth, Cisco Systems (NASDAQ:CSCO) [4], per both ranking schemes.

Fifth through eighth place occupants were shuffled in the two lists. From fifth place on, indexArb showed: International Business Machines (NYSE:IBM) [5]; Pfizer Inc. (NYSE:PFE) [6]; Boeing Company (NYSE:BA) [7]; Exxon Mobil Corp. (NYSE:XOM) [8]. YCharts had PFE [5]; IBM [6]; XOM [7]; and BA [8].

The same firm was placed ninth by both indexArb.com and YCharts.com, Intel (NASDAQ:INTC) [9].

For April (as in January, February, and March), 10th place changed the balance. IndexArb put the healthcare stalwart Merck & Co. (NYSE:MRK) [10] there. However, YCharts had the consumer goods sector representative Procter & Gamble (NYSE:PG) [10] in 10th to complete the dual, April indexArb/Yahoo top 10 Dow dividend dog lists.

Dividend Vs. Price Results For Dow Top 10

Relative strength by yield for the top 10 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 10 stocks created the data points for each period shown in blue for dividend and green for price.

Actionable Conclusions: Dow Top Dogs (1) Mixed Down Through April Per indexArb, And (2) Charged Bullishly Per YCharts

IndexArb Dow dogs mixed down with projected annual dividend from $10k invested, falling 2.2% after March. At the same time their single share price tumbled 4.5% to do the mix down.

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YCharts projected a charging scenario as its Dow dog line-up showed a 2.3% lower annual dividend from $10k invested as $1l in each of the top 10 while the aggregate single share price for those 10 rose 5.5% between March 28 and April 25.

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The differences between the indexArb and the YChart peaks and valleys over time have been caused by the movement of high price stocks with large dividends in and out of the top 10. 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 (NYSE:GE) at about $30/$1 held price and Coca-Cola (NYSE:KO) at $42/$1.40 led to far lower prices on the indexArb list. The Yahoo list, however, was pumped with Wal-Mart Stores (NYSE:WMT) at $60 /$2 and McDonald's (NYSE:MCD) $114/$3.56. So, the Yahoo price results were higher with dividends lower. In January, however, PG put its $50 higher share price in the 10th slot per indexArb while lowly Intel (INTC) occupied the 10th position in the Yahoo scheme to make the price peak for indexArb.

Actionable Conclusion (3): Dow Dogs Are Overbought

The Dow dogs' overbought condition (in which aggregate single share price of the 10 exceeded projected annual dividend from $1k invested in each of the 10) widened in January on the indexArb chart while Yahoo Finance's graph narrowed the gap. The wider gap on the indexArb graph was due to Procter & Gamble's higher price and dividend in the mix instead of Intel's place on the Yahoo chart. The January gap was estimated at $295 or 71.5% for indexArb but $253 or 63% per Yahoo Finance.

At the end of February, both graphs widened: $327 or 80.75% on indexArb, but $284 or 71.3% per Yahoo Finance. March moved the indexArb Dow gap to $396 or 102% while Yahoo had the Dow gap at $353 or 94%.

April put the gap at $369 or 98% per Dow indexArb while it was $403 or 110% per YCharts. Thus, the gap between these gaps continued to widen with the YCharts now in the lead.

The result is a lower average cost per dollar of annual dividend on indexArb of $26.61 while the Yahoo/YChart list average cost per dollar of annual dividend was $27.45.

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.

Actionable Conclusions: (4): Wall St. Wizards Forecast A 6.41% Average Upside And (5) A 6.32% Average Net Gain From All 30 Dow Dogs Through April 2017

All 30 dogs from the Dow 30 Industrials were graphed below to show the relative strengths by dividend and price as of April 25, 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 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 30 stocks divided by three created data points for 2016. Projections based on estimated increases in dividend amounts from $1,000 invested in the 30 Dow stocks and aggregate one-year analyst target share prices from Yahoo Finance divided by three created the 2017 data points green for price and blue for dividend.

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Analysts reported by Yahoo projected a 4.6% lower dividend from $10k invested as $1k in each dog of this group while aggregate single share price was projected to increase a little over 1.3% in the coming year. Since the price is still projected higher than dividend, the analysts predicted Dow dogs extending their overbought condition one year out (Personally, I think the Dow dogs are still due for a 25% to 30% downside 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 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 Assert 10 Dow Upsides Of 10.82% To 23.72%; (7) Two Dow Downsides Of -6.05% And -8.84%

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Actionable Conclusion (8): 10 Dow Dividend Dogs Go After 10.8% To 29.7% Net Gains As Of April 2017

Just two of the top-yielding dividend Dow dogs were also verified as top gainers for the coming year by analyst one-year target prices. So, this month, the dog strategy as graded by Wall Street analysts was 20% 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. (OTC:APPL) was projected to net $238.85 based on a median target price estimate from 36 analysts, combined with projected annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 44% more than the market as a whole.

Intel was projected to net $224.35, based on dividends, plus a median target price estimate from 36 analysts, less broker fees. The Beta number showed this estimate subject to volatility 6% more than the market as a whole.

Nike (NYSE:NKE) was projected to net $207.66 based on estimates from 30 analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 49% less than the market as a whole.

Microsoft (NASDAQ:MSFT) was projected to net $160.96, based on a median target price estimate from 33 analysts, combined with projected annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 7% greater than the market as a whole.

Pfizer was projected to net $130.86, based on dividends, plus the median of annual price estimates from 20 analysts, less broker fees. The Beta number showed this estimate subject to volatility 10% less than the market as a whole.

Coca-Cola was projected to net $130.08, based on dividends, plus a median target price estimate derived from 22 analysts, less broker fees. The Beta number showed this estimate subject to volatility 20% less than the market as a whole.

Goldman Sachs (NYSE:GS) was projected to net 126.04, based on dividends, plus a median target price estimate from 24 analysts, less broker fees. The Beta number showed this estimate subject to volatility 36% more than the market as a whole.

United Health Group (NYSE:UNH) was projected to net $126.04, based on dividends, plus a median target price estimate by 24 analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 36% more than the market as a whole.

General Electric was projected to net $120.81, based on target estimates from 12 analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 27% more than the market as a whole.

Visa, Inc. (NYSE:V) was projected to net $114.12, based on a median target price estimate from 31 analysts combined with projected annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 2% more than the market as a whole.

The average net gain in dividend and price less fees was over 15.79% on $10k invested as $1k in each of these 10 dogs. This gain estimate was subject to average volatility 8% more than the market as a whole.

Actionable Conclusion (9): (Bear Alerts) Analysts Projected Two Dow Dogs To Show Net Losses Averaging 6.2% By 2017

Probable losing trades revealed by Thomson/First Call in Yahoo Finance in 2017 were:

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Wal-Mart was projected to lose $55.41 based on dividend and a median target price estimate from 25 analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 81% less than the market as a whole.

Caterpillar was projected to lose $68.31 based on dividend and a median target price estimate from 18 analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 24% more than the market as a whole.

The average net loss in price plus broker fees including annual dividends was predicted to be 6.19% on $2k for two Dow dogs. This loss estimate was subject to average volatility 28% less than the market as a whole.

Five Small Dogs Of The Dow Showed 103.31% More March Gains Per indexArb, Or 54.04% More PYCharts, From $5k Invested Than From The Same Investment In All 10 Dogs

This 67.94% Higher Predicted Return for indexArb Came From MRK Instead Of CAT Included In The Yahoo Five Small Dogs

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Top 10 Dow dogs by yield from indexArb.com after March included five of nine business sectors: technology (4); basic materials (2); conglomerates (1); healthcare (2); and industrial goods (1).

Actionable Conclusions: Five Lowest-Priced High-Yield Dow Dogs (10) Delivered 12.43% Vs. (11) 6.11% Net Gains By All Ten By April 25, 2017 Per indexArb

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$5,000 invested as $1k in each of the five lowest-priced stocks in the top 10 dogs of the Dow kennel by yield were predicted by analyst one-year targets to deliver 103.31% more net gain than the same amount invested in all 10. The second lowest priced top 10 dog of the Dow, Intel, was projected to deliver the best net gain of 22.43%.

Lowest-priced five dogs of the Dow stocks for March 28 were: Cisco Systems; Intel Corp.; Pfizer, Inc.; Verizon Communications; and Merck & Co., with prices ranging from $28.43 to $56.22.

Higher-priced five Dow dividend dogs per indexArb for April 25 were: Caterpillar, Inc.; Exxon Mobil Corp.; Chevron Corp.; Boeing Company; and International Business Machines, whose prices ranged from $76.79 to $148.810.

This distinction between five low-priced dividend dogs and the general field of 10 reflects the "basic method" Michael B. O'Higgins employed for beating the Dow.

Small Dog April Gains Per YCharts

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Top 10 Dow dogs by yield from YCharts.com after February tallied six of nine sectors in the top 10: four technology firms, two basic materials firms, one conglomerate, one healthcare, one industrial goods firm, and one consumer goods company.

Actionable Conclusions : Five Lowest-Priced High-Yield Dow Dogs (12) Delivered 7.40% Vs. (13) 4.81% Net Gains By All 10 By April 25, 2017 Per Yahoo

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$5,000 invested as $1k in each of the five lowest-priced stocks in the top 10 dogs of the Dow kennel by yield were predicted by analyst one-year targets to deliver 54.04% more net gain than the same amount invested in all 10. The second lowest priced top 10 dog of the Dow, Intel, was projected to deliver the best net gain of 16%.

Lowest-priced five dogs of the Dow stocks for April 25 per YCharts were: Cisco Systems; Intel Corp.; Pfizer Inc.; Verizon Communications; and Caterpillar, Inc., with prices ranging from $28.23 to $76.79.

Higher-priced five Dow dividend dogs per YCharts for April 25 were: Procter & Gamble; Exxon Mobil Corp.; Chevron Corp.; Boeing Company; and International Business Machines, whose prices ranged from $81.41 to $148.81.

This distinction between the five low-priced dividend dogs and the general field of 10 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. It's 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 April, 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; ycharts.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

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

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.