Are August Challenger Dogs Running On Empty?

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Includes: CLMS, CLNY, CVA, EEP, ENLK, GMLP, HPT, MFIN, MMLP, SSI, SSW, SUN, TLLP, TRGP, WDR, WES, WPZ
by: Fredrik Arnold

Summary

Top ten Challengers: ENLK; WPZ; WDR; EEP; SSW; SSI; SUN; GMLP; MMLP; MFIN, averaged 11.61% yield August 4. They represented four of nine, or four of eleven, business sectors.

Fifty Dividend Dog Challengers (with 5 to 9 years of regular dividend increases) ranged from 4.5% to 16.98% in yield.

Top ten Challengers charged gently while Dow dogs mixed up through July. Wall Street analyst 1yr. targets forecast average 6.82% upside and 15.2% net gain from thirty Challengers.

Estimated 1-year gains ran 14.5% to 84.75% for TRGP, GMLP, WES, MMLP, CVA, CLNY, TLLP, SUN, WPZ, and MFIN, top ten. Two losers, HPT and CLMS, slumped 4.2% and 11.3%.

Ten Top Challenger dividend dogs ranked by yield projected 12% less gain from $5k invested in the lowest priced five than from the same investment in all ten.

The Dividend Dogs Rule

Stocks earned the "dog" moniker by exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs."

The Challenger Chase

Yield (dividend/price) results from David Fish's Dividend Challengers Index showed the top ten members resided in four of nine Yahoo business sectors [or four of eleven Morningstar sectors]: basic materials [energy] (5); services (3) [industrials (2) & consumer cyclical (1)]; financials (2) [financial services ](2). Those ten stocks posted yields averaging 11.61%.

Top Challenger dog selections for August were reviewed, step by step, below to provide actionable conclusions by yield, target price upsides, and net gains.

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Actionable Conclusion (1) 10 Top Dividend Challenger Dogs Put Up 9.04% to 16.98% Yields as of August 4

Seeking Alpha reader requests prompted this series of index-specific articles reporting dividend yield plus price upside results for these indices: Dow 30; S&P 500; S&P Aristocrats; NASDAQ 100; Russell 1000; Russell 2000; Champions; Contenders; Challengers; CCC Combined; and Global. Bonus reports cover Bad Boy AllStars, and Sector Leaders.

Fifty Show The Money

This article was written to reveal bargain stocks to buy and hold up to one full year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins' book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Including analyst price upside estimates in the analysis expanded the stock universe to include popular growth equities, as desired.

Dog Metrics Located 50 Leading Challenger Dogs by Yield

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David Fish's July 29 Challengers list contained stocks distinguished by paying increasing dividends for 5 to 9 straight years. These, ranked by yield as of August 5 closing prices, revealed the top ten.

Top yield dog for August, Medallion Financial Corp. (NASDAQ:MFIN) [1], was tops of two financial [financial services] firms ranking in the top ten by yield. The other ranked eighth, Waddell & Reed Financial Inc. (NYSE:WDR) [8].

The best of five basic materials [energy] firms placed second on this yield list, Martin Midstream Partners LP (NASDAQ:MMLP) [2]. The rest of the energy stocks placed fourth, seventh, ninth, and tenth: Sunoco LP (NYSE:SUN) [4]; Enbridge Energy Partners LP (NYSE:EEP) [7]; Williams Partners LP (NYSE:WPZ) [9]; EnLink Midstream Partners LP (NYSE:ENLK) [10].

Three service [industrial/consumer cyclical] firms captured the third, fifth, and sixth slots on the list, Golar LNG Partners LP (NASDAQ:GMLP) [3], Stage Stores, Inc. (NYSE:SSI) [5], and Seaspan Corp. (NYSE:SSW)[6], to complete the ten June/July Challengers top yield dog list.

Challenger Dividend vs. Price Results Compared With Dow Dogs

Periodic strength of ten top Challenger dogs by yield was graphed below as of market closing prices through 8/4/2016 and matched to those of the Dow. 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 shown in green for price and blue for dividend.

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Actionable Conclusion (2): Challengers Mixed Up Thoroughly As Dow Dogs Mixed Up Mildly Through July

Challengers dividend from $10k invested as $1k in each dog added pennies while aggregate single share price for the ten moved up in dollars after July to signal their complete mix-up. Challengers top ten dog dividend increased only 0.01% while price rose 11.3%. The Challengers stayed far removed from overbought status even though they closed their gap of dividend over price. Between July 8 and August 4, dividend from $10k invested in the top ten Challengers fell from 582% to 523% higher than their aggregated single share price.

The Dow dogs mix up saw their aggregate single share price for the top ten rising 0.85% between July 8 and August 4. Meanwhile annual dividend (from $10k invested as $1K in each of the top ten) rose 0.45% according to IndexArb.

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As a result, the Dow dogs' overbought condition (where aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k each in those ten) expanded slightly after July.

Actionable Conclusion (4): Dow Dogs Are Evermore More Overbought

As of September 2015 , nearly all ten dogs dropped in price to temporarily shrink the gap to $273 or 67%. October saw prices rise and dividend fall to move the price over dividend chasm to $305 or 76%. November 6 price action and top dog shuffle put the gap at $305 or 79%. As of December 4 the gap stood at $302 or 78%.

Come January 8, 2016, prices of the ten Dow top dogs fell, and dividends rose, to push the overbought gap down to $224 or 56%. In February the gap grew to $246 or 59%. A March charge put the gap up to $293 or 73%. April set a 2016 record expanding to $400 or 104%, May's price retreat brought the gap down to $350 or 91% and June put the gap at $342 or 90%. The July surge-resulting gap was $414 or 114%. August pushed it to $418 but still 114%.

The Dow Dogs remain overbought and overpriced. Meaning, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend hit $27.27

Compared to the Dow, the Challenger top ten after September 2015 progressively retreated, bear-like. In other words, Challenger aggregate dividend value of $1k invested in each dog continually rose above the aggregate single share price every month until February 2016, when the decline from peak dividends started.

In marked contrast to the Dow, Challenger Dog top ten average price per dollar of annual dividend was $8.98 as of August 4.

Actionable Conclusion (4): Ten Challenger Dogs Displayed A 8.83% Average Upside And (5) Ten Showed Average 7.9% Downside To August 2017, Analysts Reported

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

Actionable Conclusions: Wall St. Wizards Wished (6) A 6.83% Average Upside & (7) 15.19% Average Net Gain from Top 30 Dividend Challengers By August, 2017

Top thirty dogs from David Fish's Dividend Challengers list were graphed below as of August 4, 2016 as compared to analyst mean price target estimates for 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 highest yielding 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 highest yielding 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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Analyst data, as reported by Yahoo!Finance, projected a 5.8% lower dividend from $30K invested as $1k in each stock in this group while aggregate single share price was projected to increase 16.6% in the coming year.

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 charts. Three to nine analysts had a better history of 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 opposite of market direction.

Actionable Conclusion (8): Wall St. Analysts Estimated 17.5% to 84.75% Net Gains From Ten Dividend Challenger Dogs By August 2017

Five of the ten top dividend yielding Contender dogs were among the ten gainers for the coming year based on analyst 1 year target prices. So this period the dog strategy as graded by Wall St. wizards was only 50% accurate.

Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance into 2017:

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Medallion Financial was projected to net $847.57 based on dividends plus a median target price estimate by two analysts less broker fees. The Beta number showed this estimate subject to volatility 51% more than the market as a whole.

Williams Partners LP was projected to net $659.18 based on the lowest estimate from twelve analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 51% more than the market as a whole.

Sunoco LP was projected to net $455.35 based on dividends plus median target price estimate from fourteen analysts less broker fees. The Beta number showed this estimate subject to volatility 621% more than the market as a whole.

Tesoro Logistics LP (NYSE:TLLP) was projected to net $315.29 based on a median target price estimate from fourteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 721% greater than the market as a whole.

Colony Capital Inc. (NYSE:CLNY) was projected to net $299.91 based on estimates from three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 33% less than the market as a whole.

Covanta Holding Corp. (NYSE:CVA) was projected to net $225.09 based on dividend plus mean target price estimates from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 30%less than the market as a whole.

Martin Midstream Partners was projected to net $216.53 based on a median target price estimate from seven analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 67% more than the market as a whole.

Western Gas Partners LP (NYSE:WES) was projected to net $175.64 based on dividends plus seventeen analysts less broker fees. The Beta number showed this estimate subject to volatility 28% more than the market as a whole.

Golar LNG Partners LP was projected to net $166.62 based on dividends plus mean target price estimate from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 3% less than the market as a whole

Targa Resources Corp.(NYSE:TRGP) was projected to net $145.39 based on dividends plus a median target price estimate from sixteen analysts less broker fees. The Beta number showed this estimate subject to volatility 140% more than the market as a whole.

The average projected net gain in dividend and price was 35.07% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 91% more than the market as a whole.

Actionable Conclusion (9): (Bear Alert) Analysts Estimated Two Challenger Dogs To Lose 4.3% and 11.34% By 2017

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

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Hospitality Properties Trust (NYSE:HPT) was projected to lose $42.67 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 18% less than the market as a whole.

Calamos Asset Management (NASDAQ:CLMS) was projected to lose $113.41 based on dividend and a median target price estimate from three analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility equal to the market as a whole.

Actionable Conclusion (10): MFIN vs. CLMS 1yr. Price History Almost Meets Analyst Upside Expectations!

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One year price performance of Calamos Asset Management , the Champion portfolio "loser" red-lined by analysts, showed thoroughly downward price path while an almost positive price history agreed with projections for analyst tagged upside leader, MFIN.

Momentum was mostly in favor of this analyst forecast.

Dog Metrics Missed Bargains From Small Challenger Dogs

As noted above, Ten Challenger dividend dogs showing the biggest dividend yields as of August 4 represented four of nine Yahoo business sectors [or four of eleven Morningstar sectors]: basic materials [energy] (5); services (3) [industrials (2) & Consumer cyclical (1)]; financials (2) [financial services (2)]. Listed as of market close, August 4, Challenger dividend dogs arranged themselves by yield as follows:

Actionable Conclusions: Analysts Allege (11) 5 Lowest Priced of Top Ten Highest Yield Challengers Deliver 22.93% VS. (12) 26.05% Net Gains from All Ten As Of August 4, 2017

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$5000 invested as $1k in each of the five Lowest priced stocks in the top ten Challenger kennel by yield promised 12% LESS net gain than $5,000 invested as $500 in each of all ten. The second lowest priced Challenger dog, Medallion Financial Corp., was projected to deliver the best net gain of 84.76%.

Lowest priced five Challenger dogs as of August 4 were: Stage Stores Inc.; Medallion Financial Corp.; Seaspan Corp.; EnLink Midstream Partners LP; Golar LNG Partners LP, whose prices ranged from $5.53 to $18.38.

The higher priced five Challenger dogs as of August 4 were: Waddell & Reed Financial Inc.; Martin Midstream Partners LP; Enbridge Energy Partners LP; Sunoco LP; Williams Partners LP, whose prices ranged from $18.58 to $35.97.

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. It also worked sometimes for testing bargain Challenger dogs, as you may see.

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 Challenger dog stock investigation in early-July, 2016. These were not recommendations.

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

Three of these Challenger pups qualify as valuable catches! They are listed with the now 50 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.

A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. The third quarterly top gain dog will be announced in soon (August 21).

For a free copy of both quarterly reports and analysis of the winning Arnold Q1, Q2, & coming Q3 August picks, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: fredrika120@gmail.com. Remember: E-mail, ticker, team!

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.

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 indexarb.com; YCharts.com; analyst mean target prices by Thomson/First Call in Yahoo Finance. Dog photo courtesy of nextdaypets.com

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.