Contenders Vs. Dogs Of The Dow For February

by: Fredrik Arnold

Dividend Contenders: Eleven Increases Expected by the End of April was published last week by David Fish here on Seeking Alpha. He defines Contenders as companies that have paid higher dividends for 10-24 years. This article uses the dogs of the index strategy to sort David's Contenders as of February 24 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?" This article also aims 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 writing.

Comparative Methods Used

First, David Fish's Contenders list (from here) as of January 31st showing 152 companies paying increasing dividends for 10 - 24 years is 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 the top ten dividend Contenders 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.

Dividend Contenders (Click to enlarge)

Top ten Contender stocks paying the biggest dividends for February include firms representing four of nine market sectors. The top stock Inergy LP (NRGY) is one of two in the utilities sector. The balance of the top ten include one consumer, two financial and five basic materials firms representing the market sectors.

Vertical Moves of Dividend Contender Stocks

Going back four months, one utility sector equity Inergy LP has claimed the top of this list by yield. The middle of the list shows the most action.

Color code shows: (Yellow) firms listed in first position at least once 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.

(Click to enlarge)

Bullish vertical moves were made since January 13 by Vector Group (NYSE:VGR) with a 5.8% price gain; NuStar Energy (NYSE:NS) with a 10.67% price gain; National Retail Properties (NYSE:NNN) with a 1.17% price gain; TC Pipelines LP (NYSE:TCP) showed a .6% gain; National Health Investors (NYSE:NHI) dropped out of the top ten by showing 5.73% price improvement.

Bearish moves for the same period were experienced by Inergy LP (NRGY) showing a 22.6% price decline, yet managing to hold the top spot; Suburban Propane Partners (NYSE:SPH) with a 1.95% decline; Buckeye Partners LP (NYSE:BPL) with a 3% decline; Universal Health Realty Trust (NYSE:UHT) dropping .56% within the top ten.

January Dividend vs. Price Pit Contenders vs. Dow

Below are graphs of the relative strengths of the top ten Dividend Contenders index stocks by yield and price from October 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.

(Click to enlarge)

Conclusion: A Volatile Team of Dogs Mushes On

This Contenders collection of top ten dividend payers shows increasing dividends as their aggregate single share prices also rose. 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 Contenders index now pays 94% higher dividends from about the same aggregate single share per share price as 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; Fish 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.