Will The Brexit Quake Shake The Dogs Of The Dow?

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Includes: APPL, BA, CAT, CSCO, CVX, DIS, GS, HD, IBM, INTC, JPM, MRK, MSFT, NKE, PFE, PG, V, VZ, WMT, XOM
by: Fredrik Arnold

Summary

Top ten Dow dog yields averaged 3.79% per indexArb.com or 3.69% per YCharts.com June 24. Top 11 were: BA (or PG), MRK, XOM, INTC, PFE, CSCO, IBM, VZ, CVX and CAT.

IndexArb projected a bullish advance, while YCharts showed a mix down for top ten Dow dogs. Analyst 1yr. targets disclosed 21.48% average top ten upsides. One posted a 4.11% downside.

Top ten net gainers ranged from 15.5% to 32.46% from DIS, INTC, V, JPM, HD, BA, MSFT, AAPL, GS and NKE. A 3.3% loss was projected for WMT.

Dow dogs posted 23.99% more gain per IndexArb or 53.53% more per YCharts from $5k invested in lowest priced five than $5k in all ten. (PG replaced BA on YCharts).

What is a dividend dog?

It is a stock that pays a reliable, repeating dividend, whose price has fallen to a point where its yield (dividend/price) has grown higher than its peers (by industry, sector, index or portfolio). Thus, the highest yielding stocks in any collection may be identified as "dogs."

The Dow 30 Done Two Ways

Yield (dividend/price) results from indexArb.com and YCharts.com for 30 Dow industrial stocks as of market closing prices June 24 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."

Two Systems Rate Dow Dogs by Yield

Top ten Dow dogs by yield from IndexArb.com after April included five of nine business sectors: technology (4); conglomerates (1); basic materials (1); healthcare (2); industrial goods (2); Financials, consumer goods & services did not make the IndexArb.com 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 May-20-2016. 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."

Top ten Dow dogs by yield from YCharts.com after April lost one in the industrial goods sector to gain one in consumer goods. So unlike IndexArb, with five sectors represented, YCharts tallied six of nine: four technology firms, one conglomerate, one basic materials firms, two healthcare, one industrial goods firm and one consumer goods. (In the YCharts scheme only financials & services did not make the top ten since Dow always puts Utilities in its separate index.)

Also note that YCharts subscribes to Morningstar's eleven sector naming convention as tracked here: Basic Materials; Communication Services; Consumer Cyclical; Consumer Defensive; Energy Financial Services; Healthcare; Industrials; Real Estate; Technology; Utilities.

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

After May, IndexArb.com and YCharts.com, put none of the top ten firms in the same order: Verizon (NYSE:VZ) [1], a technology firm, showed the best dividend yield as of market close for IndexArb, but for YCharts Caterpillar (NYSE:CAT) was top dog.

IndexArb, used the second slot for Caterpillar [2], while YCharts used second for Chevron (NYSE:CVX). That stock was third for IndexArb, but for YCharts Verizon [3] was in that slot. Cisco Systems (NASDAQ:CSCO) [4] placed fourth for IndexArb, but it was International Business Machines (NYSE:IBM) [4] for YCharts. That firm was fifth for IndexArb, but for YCharts it was Pfizer Inc. (NYSE:PFE) [5].

IndexArb ceded sixth place to the industrial goods aircraft behemoth, Boeing Company (NYSE:BA) [6], while for YCharts, Exxon Mobil (NYSE:XOM) was in that slot. In seventh place, IndexArb had Pfizer [7] but for YCharts, it was Merck & Co (NYSE:MRK). The eighth place was occupied by Intel Corp. (NASDAQ:INTC) [8] for IndexArb, while YCharts had Procter & Gamble (NYSE:PG) in that position.

The ninth position for IndexArb belonged to Exxon Mobil [9], however it was Cisco Systems in YCharts. Finally, the tenth slot belonged to Merck & Co [10] for IndexArb, while YCharts had Intel Corp. tenth.

The big differentiator for the two lists was Boeing (BA) being included on the IndexArb list, while Procter & Gamble showed up on YCharts.

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] Charged Bullishly Per IndexArb and [2] Mixed Down On YCharts In June

IndexArb Dow dogs advanced with projected annual dividend from a $10k investment falling 2.8% after May. At the same time, their single share price soared 11.2% to sound the charge.

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YCharts projected a mix down for Dow dogs. They showed a 3.3% decline in annual dividend from $10k invested as $1K in each of the top ten, while the aggregate single share price for those ten fell 2.9% between May 19 and June 24.

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The differences between the IndexArb and the Y 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 (NYSE:GE) at about $30/$1 held price and Coca-Cola Co. (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) at $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 tenth slot per IndexArb, while lowly INTC occupied the tenth position in the Yahoo scheme to make the price peak higher for IndexArb.

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 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 DowIndexArb, while it was $403 or 110% per YCharts. Thus, the gap between these gaps continued to widen with the YCharts now in the lead. May narrowed both leaving Ycharts leading with a 21.7% wider gap. In June IndexArb price soared (powered by Boeing) to put that list up to $362 or 95% while YCharts went to $328 or 89% to put DowIndexArb back on top.

The result is a lower average cost per dollar of annual dividend on IndexArb of $26.17 while the Yahoo/YChart list average cost per dollar of annual dividend was $26.78.

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 11.2% Average Upside & (5) A 9.28% Average Net Gain from All 30 Dow Dogs Through June 2017

All thirty dogs from the Dow 30 Industrials were graphed below to show relative strengths by dividend and price as of June 24, 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 a 8.6% lower dividend from $10K invested as $1k in each dog of this group while aggregate single share price was projected to increase 10.9% in the coming year. Since price 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. Perhaps this "Brexit" static will set those Dow dice a tumbling.)

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 14.1% to 33.11%; (7) 4 Dow Downsides of -1.41% to -4.11%

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Actionable Conclusion (8): Ten Dow Dividend Dogs Go After 15.52% to 32.47% Net Gains As Of June 2017

Just two 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 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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Nike (NYSE:NKE) was projected to net $324.65 based on estimates from twenty-eight analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 49% less than the market as a whole.

Goldman Sachs (NYSE:GS) was projected to net 303.49 based on dividends plus a median target price estimate from twenty-three analysts less broker fees. The Beta number showed this estimate subject to volatility 32% more than the market as a whole.

Apple Inc. (NASDAQ:AAPL) was projected to net $289.85 based on a median target price estimate from thirty-seven analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 49% more than the market as a whole.

Microsoft Corp. (NASDAQ:MSFT) was projected to net $216.00, based on a median target price estimate from thirty-five analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 4% greater than the market as a whole.

Boeing Company was projected to net $206.37 based on a median target price estimate from eighteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 23% more than the market as a whole.

Home Depot (NYSE:HD) was projected to net $190.13 based on target estimates from twenty-five analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 3% less than the market as a whole.

JPMorgan Chase (NYSE:JPM) was projected to net $186.71, 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 18% more than the market as a whole.

Visa (NYSE:V) was projected to net $161.21 based on dividends plus the median of annual price estimates from thirty-one analysts less broker fees. The Beta number showed this estimate subject to volatility 2% more than the market as a whole.

Intel Corp. was projected to net $155.28 based on dividends plus a median target price estimate from thirty-four analysts less broker fees. The Beta number showed this estimate subject to volatility 6% more than the market as a whole.

Walt Disney (NYSE:DIS) was projected to net $155.20 based on dividends plus a median target price estimate derived from twenty-seven analysts less broker fees. The Beta number showed this estimate subject to volatility 44% more than the market as a whole.

The average net gain in dividend and price less fees was nearly 21.9% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 13% more than the market as a whole.

Actionable Conclusion (9): (Bear Alert) Analysts Projected One Dow Dog To Show A Net Loss Of 3.3% By 2017

A probable losing trade revealed by Thomson/First Call in Yahoo Finance in 2017 was:

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Wal-Mart Stores was projected to lose $33.06 based on dividend and a median target price estimate from twenty-five analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 79% less than the market as a whole.

5 Small Dogs Of The Dow Showed 23.99% More June Gains per IndexArb, Or 53.53% More per YCharts, from $5K Invested, than From The Same Investment In All Ten Dogs.

A 1.03% Higher Predicted Small Dog Return for IndexArb Came From BA Instead Of PG Placing In The 5 Big Dogs

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

Actionable Conclusions: Five Lowest Price High Yield Dow Dogs (10) Delivered 10.3% Vs. (11) 8.31% Net Gains by All Ten by June 24, 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 23.99% more net gain than the same amount invested in all ten. The ninth lowest priced top ten dog of the Dow, Boeing, was projected to deliver the best net gain of 10.64%.

Lowest priced five dogs of the Dow stocks for June 24 were: Cisco Systems; Intel Corp.; Pfizer Inc.; Verizon Communications; Merck & Co., with prices ranging from $27.75 to $55.88.

Higher priced five Dow dividend dogs per IndexArb for June 24 were: Caterpillar Inc.; Exxon Mobil; Chevron Corp.; Boeing Company; International Business Machines, whose prices ranged from $73.03 to $146.59.

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 June Gains per YCharts

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

Actionable Conclusions : Five Lowest Price High Yield Dow Dogs (12) Delivered 10.19% Vs. (13) 6.64% Net Gains by All Ten by June 24, 2017 per YCharts

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$5000 invested as $1k in each of the five Lowest priced stocks in the top ten dogs of the Dow YChart kennel by yield were predicted by analyst 1-year targets to deliver 27.7% more net gain than the same amount invested in all ten. The second lowest priced top ten dog of the Dow, Intel Corp., was projected to deliver the best net gain of 15.40%.

Lowest priced five dogs of the Dow stocks for June 24 per Y Charts were: Cisco Systems, Intel Corp., Pfizer Inc., Verizon Communications and Merck & Co., with prices ranging from $27.75 to $55.88.

Higher priced five Dow dividend dogs per Y Charts for June 24 were: Caterpillar Inc., Procter & Gamble, Exxon Mobil Corp., Chevron Corp., Boeing Company and International Business Machines, whose prices ranged from $73.03 to $146.59.

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. 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.

Annual Analyst Accuracy

You see below the one year result of ten analyst target estimates for Dow stocks per Yahoo from this article in 2015. These were applied to the "basic method" Michael B. O'Higgins employed for beating the Dow. The key shows: losses in a reddish tint; poor results tinted yellow; gains tinted green; no tint means no difference.

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The one year result of ten analyst target estimates below for Dow stocks per IndexArb from this article in 2015 was identical.

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The "basic method" top ten annual analyst accuracy score for early June 2015 was two losses and one poor performance against seven gains.

The stocks listed above were suggested only as reference points for a Dow Industrial equities dog dividend stock investment research process in late-June, 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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A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. For a free copy of both quarterly reports and analysis of the winning Arnold Q1 & Q2 picks, plus a surprise bonus bottom dog report, just send your e-mail address, ticker symbol for your favorite dividend stock and name of your favorite team of any type to: fredrika120@gmail.com. Remember: E-mail, ticker, team!

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, GE, 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.

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.