Challengers Vs. Dogs Of The Dow For February 2012

by: Fredrik Arnold

Dividend Challengers:16 Increases Expected In The Next Ten Weeks was published by David Fish February 21 on Seeking Alpha. He defines Challengers as companies that have paid higher dividends for 5-9 years. This article utilizes the dogs of the index strategy to sort David's Top ten Challengers as of January 13 into a suitable grouping of ten to trade.

One aim of this article is to help answer the question, "which dividend stocks are good, better, best, bad or ugly?" Another aim is to provide strong evidence of the need to heed Yale professor Robert Shiller's observation: "People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."

The Dogs of the Index Strategy

Two key metrics determine the yields that rank index dog stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declares the percentage yield by which each dog stock is ranked. Investors select portfolios of five or ten stocks in any one index by yield to trade. They await the results from their investments in the lowest priced, highest yielding stocks they selected and pray that the price of every stock they now own climbs (having locked in a high yield percentage at purchase).

This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), reveals how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) can be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index.

Classic Dogs of the Index theory trades selected Dow stocks. Thus, the Dow is used as a standard of comparison to conclude this piece.

Comparative Methods Used

First, David Fish's Challengers list (from here) as of January 31st showing 202 companies that paid increasing dividends for 5 - 9 years was updated with pricing information from Yahoo Finance as of February 24, then sorted by yield to reveal the top thirty stocks. Market performance of these thirty selections is then reviewed using four months of historic projected annual dividend history.

To conclude, this article assesses the relative strengths of Mr. Fish's top ten dividend Challengers vs. the Dogs of the Dow February stock list. Annual dividends from $1000 invested in the ten highest yielding stocks in each index, versus the aggregate single share prices of the top ten stocks in each index, provide a measure of risk.

Top Dividend Challengers

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The top ten Challenger stocks paying the biggest dividends for February include firms representing four of nine market sectors. The top stock Dynex Capital Inc. (NYSE:DX) is one of three in the financial sector. The balance of the top ten include one consumer, one service, and five basic materials firms representing the market sectors.

Vertical Moves of Dividend Challenger Stocks

Going back four months, two financial sector equities PennantPark Investment Corp. (NASDAQ:PNNT), and Dynex Capital Inc. have claimed the top of this list by yield. One technology sector stock, Telefonica S.A. (NYSE:TEF), also briefly held the top but failed to raise its dividend, so was dropped from the list as of 12/30/11.

Color code shows: (Yellow) firms listed in first position at least once between between November 2011 and February 2012; (Cyan Blue) firms listed in tenth position at least once between November 2011 and February 2012; (Magenta) firms listed in twentieth position at least once between November 2011 and February 2012; (Green) firms listed in thirtieth position at least once between November 2011 and February 2012. Duplicates are depicted in color for highest ranking attained.

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Click to enlargeBullish vertical moves were made since January 13 by Exterran Partners LP (EXLP) with a 14.66% price gain; Dynex Capital with a 2.5% price gain; PennantPark Investment with a 3.17% price gain; Triangle Capital (NYSE:TCAP) showed a 1.97% gain; Transmontaigne Partners (NYSE:TLP) moved into of the top ten despite showing a 1.74% price improvement.

Bearish moves for the same period were experienced by StoneMor Parters (NASDAQ:STON) showing a 1.9% price decline; Natural Resource Partners (NYSE:NRP) with a 9.43% decline; National Presto Industries (NYSE:NPK) with a .34% decline; Boardwalk Pipeline Partners (NYSE:BWP) dropping .65% within the top ten.

February Dividend vs. Price Contrast Challengers vs. Dow

Below are graphs of relative strengths for the top ten dividend Challengers index stocks by yield and price from November to February to those of the Dow. Using four months of historic projected annual dividend history from $1000 invested in the ten highest yielding stocks each month and the aggregate single share prices of those ten stocks creates the data points for each month shown in green for price and blue for dividends.

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Conclusion: Challengers Dividends Drop as Prices Run Up

This Challengers collection of 30 up and coming dividend payers shows sinking dividends as their aggregate single share prices made an uptick. The Dow index, on the other hand, exhibited crossover as dividends from $1k invested in the top ten decreased, while aggregate total single share prices rose above them in the past month. The Challengers index currently pays far higher dividends from an aggregate single share price, notably lower than that of the Dow

At the end of each month, two summaries conclude this new series of articles showing comparative results of yield and price for six indices: Carnevale Power 25; Dividend Champions; Contenders; Challengers; Dow 30 Index.

Disclosure: I am long T, VZ, INTC, JNJ, CVX.

Disclaimer: This article is for informational and educational purposes only and shall 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, unless noted otherwise, are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.