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 Case For Challengers
Yield (dividend/price) results from David Fish's Dividend Challengers Index showed the top ten members resided in five of eleven Morningstar sectors: energy (4); industrials (2); consumer cyclical (1); financial services (2); real estate (1). Those ten stocks posted yields averaging 11.62%.
Top Challenger dog selections for October were reviewed, step by step, below to provide actionable conclusions by yield, target price upsides, and net gains.
Actionable Conclusion (1) 10 Top Dividend Challenger Dogs Claimed 9.05% to 16.13% Yields as of October 7
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 For 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 Refined 50 Leading Challenger Dogs by Yield
David Fish's September 30 Challengers list contained stocks distinguished by paying increasing dividends for 5 to 9 straight years. These, ranked by yield as of October 7 closing prices, revealed the top ten. October was the best of four energy firms, Martin Midstream Partners LP (NASDAQ:MMLP) . The rest of the energy stocks placed fourth, eighth, and tenth: Sunoco LP (NYSE:SUN) ; Williams Partners LP (NYSE:WPZ) ; EnLink Midstream Partners LP (NYSE:ENLK) .
One real estate firm placed second by yield, Corrections Corp of America (NYSE:CXW) . Two industrial firms captured the third, and fifth slots on the list, Golar LNG Partners LP (NASDAQ:GMLP) , and Seaspan Corp. (NYSE:SSW).
One consumer cyclical firm placed sixth, Stage Stores, Inc. (NYSE:SSI) . Finally, two financial services firms placed seventh, and ninth, Waddell & Reed Financial Inc. (NYSE:WDR) , and Colony Capital Inc. (NYSE:CLNY) , to complete the ten October Challengers top yield dog list.
Challenger Dividend vs. Price Matched Against Dow
Periodic strength of ten top Challenger dogs by yield was graphed below as of market closing prices through 10/7/2016 and matched against 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.
Actionable Conclusion (2): Challengers And Dow Dogs Retreated Bearishly Into October
Challengers dividend from $10k invested as $1k in each dog climbed while aggregate single share price for the ten tumbled after September to signal their bearish retreat. Challengers top ten dog dividend inclined 9% while price fell 9%. The Challengers moved further away from overbought status widening their gap of dividend over price. Between September 2 and October 7, dividend from $10k invested in the top ten Challengers rose from 447% to 554% higher than their aggregated single share price.
The Dow dogs retreat saw their aggregate single share price for the top ten falling 10.4% between September 2 and October 7. Meanwhile annual dividend (from $10k invested as $1K in each of the top ten) rose 1.6% according to IndexArb.
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) retreated from their new record after September.
Actionable Conclusion (4): Dow Dogs Became Less Overbought
January 8, 2016, the overbought gap was down to $224 or 56%. In February the gap grew to $246 or 59%. A March charge put the gap at $293 or 73%. April set a 2016 record expanding to $400 or 104%, May's brought the gap down to $350 or A July surge made it $414 or 114%. August pushed the gap to $418 but still 114%. September grew the gap to another record for the year, $471 or 128%. October rolled the chasm back to $378 or 101%.
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 was $26.70.
In marked contrast to the Dow, Challenger Dog top ten average price per dollar of annual dividend was $8.68 as of October 7.
Actionable Conclusion (4): Analysts Said Ten Challenger Dogs Displayed A 29.38% Average Upside And (5) Ten Showed Average 0.8% Downside To October 2017,
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 Cast (6) A 11.94% Average Upside & (7) 18.43% Average Net Gain From Top 30 As Of October, 2017
Top thirty dogs from David Fish's Dividend Challengers list were graphed below as of October 7, 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.
Analyst data, as reported by Yahoo!Finance, projected a 10% lower dividend from $30K invested as $1k in each stock in this group while aggregate single share price was projected to increase 11.4% 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. Wizards Estimated 23.34% to 66.48% Net Gains From Ten Dividend Challenger Dogs By October 2017
Four 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 40% accurate.
Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance into 2017:
Corrections Corp of America was projected to net $664.76 based on dividend plus mean target price estimates from four analysts less broker fees. The Beta number showed this estimate subject to volatility 56% less than the market as a whole.
Williams Partners LP (WPZ) was projected to net $636.16 based on the lowest estimate from twelve analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 69% more than the market as a whole.
Colony Capital Inc. was projected to net $417.39 based on estimates from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 23% less than the market as a whole.
Preferred Apartment Communities (NYSEMKT:APTS) was projected to net $355.00 based on a median target price estimate from eight analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 65% less than the market as a whole.
Stage Stores Inc. was projected to net $294.81 based on dividends plus a median target price estimate by five analysts less broker fees. The Beta number showed this estimate subject to volatility 41% more than the market as a whole.
Tesoro Logistics LP (NYSE:TLLP) was projected to net $294.70 based on a median target price estimate from fifteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 35% greater than the market as a whole.
Sunoco LP was projected to net $276.69 based on dividends plus median target price estimate from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 646% more than the market as a whole.
Chatham Lodging Trust (NYSE:CLDT) was projected to net $258.58 based on dividends plus a median target price estimate from four analysts less broker fees. The Beta number showed this estimate subject to volatility 8% more than the market as a whole.
Select Income REIT (NYSE:SIR) was projected to net $238.94 based on dividends plus five analysts less broker fees. The Beta number showed this estimate subject to volatility 20% less than the market as a whole.
Sotherly Hotels Inc. (NASDAQ:SOHO) was projected to net $233.38 based on dividends plus mean target price estimate from five analysts less broker fees. The Beta number showed this estimate subject to volatility 40% less than the market as a whole
The average projected net gain in dividend and price was 36.7% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 68% more than the market as a whole.
Actionable Conclusion (9): CXW vs. TRGP YTD Price History Contradicts Analyst Upside Expectations!
Five year price performance of Targa Resources Corp. (NYSE:TRGP), the Challenger portfolio "loser" red-lined by analysts, showed a remarkably vertical price history while projections for analyst tagged upside leader, Williams Partners LP plumbed the depths.
Momentum contradicts the broker brain trust again.
Dog Metrics Saw No Bargains From Small Challenger Dogs
As noted above, Ten Challenger dividend dogs showing the biggest dividend yields as of October 7 represented five of eleven Morningstar sectors: energy (4); industrials (2); consumer cyclical (1); financial services (2); real estate (1). Listed as of market close, October 7, Challenger dividend dogs arranged themselves by yield, as follows:
Actionable Conclusions: Analysts Assert (10) 5 Lowest Priced of Top Ten Highest Yield Challengers Deliver 26.78% VS. (11) 26.97% Net Gains from All Ten As Of October 7, 2017
$5000 invested as $1k in each of the five Lowest priced stocks in the top ten Challenger kennel by yield promised 0.66% LESS net gain than $5,000 invested as $500 in each of all ten. The fourth lowest priced Challenger dog, Corrections Corp of America , was projected to deliver the best net gain of 66.48%.
Lowest priced five Challenger dogs as of October 7 were: Stage Stores Inc.; Calamos Asset Management Inc.; Seaspan Corp.; Corrections Corp of America; EnLink Midstream Partners LP, whose prices ranged from $5.40 to $17.24.
The higher priced five Challenger dogs as of October 7 were: Waddell & Reed Financial Inc.; Golar LNG Partners LP; Martin Midstream Partners LP; Enbridge Energy Partners LP; Sunoco LP; Williams Partners LP , whose prices ranged from $17.73 to $36.47.
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 works sometimes for testing bargain Challenger dogs, as you almost saw.
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.
Annual Analyst Accuracy
You see below the one year result of ten analyst target estimates for Challenger stocks per YahooFinance data covering this Seeking Alpha article from late-October in 2015. These graded 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.
The "basic method" top ten annual analyst accuracy score for The Top Ten Contenders by yield between late-October 2015 vs. 2016 was five losses, and five gains. No small dogs were gainers, all five gainers were big Challenger dogs. O'Higgins basic method completed this test at only a 50% success rate.
The stocks listed above were suggested only as reference points for a Challenger dog stock investigation in early-October, 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 52 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.
Top performing DOTW dogs for the first through third quarters have been named. A fourth quarterly winner will be announced November 16.
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For a free copy of quarterly reports Q1, Q2 and Q3 picks, plus the twelve dogs of the month selections, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: email@example.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: midlifexpress.com.
Disclosure: I am/we are long APTS, GE, 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.