February Industrial Goods Sector Dog Dividend Review

by: Fredrik Arnold

In December, this monthly report series began applying dog dividend methodology to each of eight major market sectors: Basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities. The ninth sector, conglomerates, according to Yahoo Finance, contained just eight firms, five of which pay dividends. Thus we 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 ranked index or 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 was 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 industrial goods 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 five 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 assess the relative strengths of the industrial goods sector top ten dividend dogs as of February 24 vs. the Dogs of the Dow February 10 stock list. Annual dividends from $1000 invested in the ten highest yielding stocks in the sector were compared to the aggregate single share prices of the top ten stocks in the sector.

Industrial Goods Dividend Dogs (Click to enlarge)

The top ten industrial goods sector stocks paying the biggest dividends in January represented six industries. Top industrial goods sector stock Veolia Environement (VE) is one of three waste management firms in the top ten. The others are: Waste Management (NYSE:WM); American Ecology (NASDAQ:ECOL). The top ten includes two residential construction firms: MDC Holdings (NYSE:MDC); Gafisa (NYSE:GFA). They also include two aerospace & defense products & services firms: Lockheed Martin (NYSE:LMT); Elbit Systems (ESLT). The remaining three of the top ten represent one industry each: Highway Holdings (NASDAQ:HIHO), metal fabrication; Skyline (NYSE:SKY), manufactured housing; KSW Inc. (NASDAQ:KSW), general contractors.

Vertical Moves in Industrial Goods Dividend Dog Stocks

Going back four months, Xinyuan Real Estate (NYSE:XIN) claimed the top of this list by yield and stayed there throughout Q4 2011, then Veolia Environement rose from second place in Q4 to take the lead by yield in January by virtue of a Xinyuan price increase from $1.76 to $2.35 in one month sending Xinyuan to the ninth slot. In February, Veolia still held the yellow tinted top spot and Xinyuan Real Estate dropped out of the top ten by yield.

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 top stock by yield, Veolia Environnement, whose share price increased 14.7%; Skyline Corporation price increased 36.9%; Lockheed Martin showed an 18.15% gain; Gafisa Express had a 13.52% price gain; KSW Inc. showed a 9.25% increase; Waste Management went up 4.98% in price; January's ninth position dog, Xinyuan Real Estate exited the top ten as a result of its 9.79% price gain; American Ecology Corporation price climbed 3.46%.

Bearish moves for the same period were experienced by just two firms in the top ten: Highway Holdings Limited had a 16.5% price decline along with an annual estimated dividend cut of 31.03% from $.29 to $.20; Elbit Systems climbed into the top ten industrial sector dog pound by yield after posting a 10.9% price decline.

Dividend vs. Price Results for Industrial Goods vs. Dow Dogs

Below is a graph of the relative strengths of the top ten industrial goods 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: Industrial Goods Sector Dogs Bark

The February industrial goods collection of 10 top dividend payers showed a 24.1% increase in aggregate single share prices over the five monthly points surveyed. Dividends from $1k invested in each of the top ten declined 22.65% for that period.

Meanwhile, 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 industrial goods sector top ten showed about $126 more annual dividends (with equally bigger risk) from $1k invested in each stock at a $218 lower aggregate share price for the top ten dogs than those of the Dow as of February.

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, ITC, 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.