February Financial Sector Dogs On A Run

by: Fredrik Arnold

This monthly report series began in December; applying dog dividend methodology to each of eight major market sectors. In alphabetical order these sectors are: Basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

According to Yahoo Finance, the ninth sector, conglomerates, contained just eight firms of which five paid dividends. Thus the reporter declined to apply dogs of the index metrics to such a limited universe, declaring:

Such a task is comparable to a dog show judge trying to evaluate a Chihuahua based on St. Bernard conformation standards.

Dogs of the Index Metrics Used to Select The Top Ten Sector Stocks

Two key metrics determined the yields that rank sector dog stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declared the percentage yield by which each dog stock is ranked. Investors select portfolios of five or ten stocks in any one index or sector 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 higher (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), revealed 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.

Comparative Methods Used

First, the entire list of financial sector companies was sorted by yield as of February 24 using Ycharts.com to reveal the top thirty. Market performance of these thirty selections was then reviewed using four months of historic projected annual dividend history from Yahoo Finance, with annual divided projections reviewed and adjusted for market realities.

Thereafter, today's article goes on to describe how the relative strengths of the financial sector top ten dividend dogs were assessed as of February 24 vs. the Dogs of the Dow January 10 stock list. Annual dividends from $1000 invested in the ten highest yielding stocks in the sector and index were compared to the aggregate single share prices of the top ten stocks in the sector and index.

Financial Dividend Dogs (Click to enlarge)

The top ten financial sector stocks that paid the biggest dividends in February represented six industries. Top financial sector stock Armour (NYSE:ARR) was one of six REITs in the top ten. Four, (American Capital (NASDAQ:AGNC), Armour , Two Harbors (NYSE:TWO), and CYS Investments (NYSE:CYS), were residential REITs; Chimera (NYSE:CIM) was a diversified REIT, and Resource Capital (NYSE:RSO) was a retail REIT. The remaining five included Life Partners (NASDAQ:LPHI), life insurance, Invesco (NYSE:IVR), mortgage investment, BBVA Banco (NYSE:BFR), foreign regional bank, and Arlington (NYSE:AI), investment brokerage, in the top ten.

Vertical Moves in February's Financial Dogs

Going back four months, American Capital claimed the top of this list by yield for the first two months of the quarter, then BBVA Banco rose from tenth place in October to take the lead by yield in December by virtue of a 23% price drop from $6.69 to $5.15 in two months. January found American Capital back on top. February had Armour Residential tinted yellow at the top.

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 made since January 20 included the aforementioned Armour Residential, with a share price increase of 1.0%; American Capital Agency increased 5.73% in price; Resource Capital had a 4.72% price gain; Life Partners showed a near 5% increase; Invesco Mortgage Capital had a 13.06% price gain; Two Harbors Investment posted a 7.06% price gain; Arlington Asset Management put up a 4.36% gain; Chimera Investment did a 5.15% gain; MCG Capital Corporation (NASDAQ:MCGC) exited the top ten as a result of its 5.66% price gain.

Bearish moves for the same period were experienced by just two firms in the top ten: BBVA Banco Frances S.V had a 4.96% price decline; CYS Investments climbed into the top ten by yield upon posting a .66% decline.

Dividend vs. Price Results vs. Dow Dogs

Below is a graph of the relative strengths of the top ten financial dividend sector stocks by yield as of February 24, 2012 compared 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 total single share prices of those ten stocks created the data points for each month shown in green for price and blue for dividends.

Click to enlarge:

Conclusion: Financial Dogs on a Run

The February financial collection of top ten dividend payers showed steady horizontal market performance in price at the four monthly points surveyed. However, the steady decrease in projected dividends from $1k invested in each of the top ten from a steady share price was profoundly bullish.

Meanwhile, as of February 24, the Dow index moved beyond convergence as dividends from $1k invested in the top ten sank lower than aggregate total single share prices in February. The financial sector top ten promised $1,204 more dividends (with equally bigger risk) from $1k invested in each stock at a $335 lower aggregate single share price for its top ten dogs than those of the Dow.

At the end of each month, two summaries will conclude this new series of articles by showing comparative results of yield and price for all eight sectors reported: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

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 are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

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