AFAM's 10 Undervalued Dividend Dogs Chase A Bear In May

by: Fredrik Arnold

John Buckingham, chief investment officer at Al Frank Asset Management, now named AFAM, declared 10 equities undervalued. His list was published May 14 by Shirley Lazo in her "Speaking of Dividends" Barron's Financial Weekly column. This low current valuation, of course, makes these equities very appealing based on upside potential.

Dogs of the Index Metrics Rank the AFAM List

For this article, the AFAM undervalued 10 were ranked using the two key dog performance metrics: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price declared the percentage yield by which each AFAM listed stock was ranked.

Historically, dividend dog investors utilized this ranking system to select portfolios of five or ten stocks in any one index, sector, or survey to trade. They awaited the results from their investments in the lowest priced, highest yielding stocks and prayed that the price of every stock they now owned climbed higher (having locked in a high yield percentage at purchase).

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

AFAM undervalued 10 dogs listed below were ranked by yields calculated as of May 16. Classic Dogs of the Index theory trades selected Dow stocks. Thus, the Dow is used as a standard of comparison to conclude this article.

AFAM Undervalued 10 Dividend Dogs

The AFAM undervalued 10 dogs as of May 16 included equities representing eight of nine market sectors. So it's a fairly well-diversified list. The top stock as revealed by Yahoo Finance data, was the one in the financial sector, Anworth Mortgage (NYSE:ANH). The balance of the top 10 included: One services, Navios Maritime (NYSE:NM); two basic materials firms, Total (NYSE:TOT), and Newmont Mining (NYSE:NEM); two industrial goods firms, Lockheed Martin (NYSE:LMT), and Waste Management (NYSE:WM); one healthcare firm, Merck (NYSE:MRK); one technology firm, Intel (NASDAQ:INTC); two consumer goods companies, Hasbro (NASDAQ:HAS), and PepsiCo (NYSE:PEP), representing the sectors.

Up and Down Moves for AFAM Undervalued 10 Dividend Dogs

The Barron's report noted five of these 10 were also listed as undervalued by AFAM in 2011. Two of them, Lockheed Martin, and Intel, were up in price over the past year, while the other three, Navios, Total, and Waste Management, were down. Reporter Lazo noted however that the AFAM investment officer "Buckingham still finds [those three] appealing."

In a back-test of price fluctuation, top dog, Anworth Mortgage, claimed the top slot on this 10 stock list by yield for the four months surveyed.

Color code shows: (Yellow) firm listed in first position at least once between February and May; (Pale Blue) firms listed in fifth position at least once between February and May; (Pale Green) firms listed in tenth position at least once between February and May.

Bullish upward price moves since April 16 were made by just three of the AFAM undervalued 10 dogs: Anworth Mortgage booked a 4.13% boost; Hasbro toyed with a .64% hike; PepsiCo fizzed up 3.18%.

Bearish downward price moves for the same period hit the remaining seven of the AFAM undervalued 10 dogs: Navios Maritime price fell 15.1%; Total drilled a 7.975% price drop; Lockheed Martin piloted a 7.17% decline; Merck injected a 1.29% decline; Waste Management dropped off a 9.09% price decline; Intel chipped off a 3.985% swoon; Newmont Mining dug a 7.92% retrenchment.

Dividend vs. Price Results

Below relative strengths, the AFAM undervalued 10 dogs by yield was graphed as of May 16, 2012. Five months of historic projected annual dividend history from $1000 invested in the 10 highest yielding stocks and the total single share prices of those 10 stocks created the data points for each month shown in green for price and blue for dividends.

Conclusion: AFAM Undervalued 10 Dividend Dogs Chase a Bear in May

These AFAM undervalued 10 dogs show moderate dividend yield at potentially moderate risk (some listed equities may struggle to sustain projected dividends). As of May 16, dividends from $1k invested in all 10 exceeded price by 37.34%.

A mostly bearish trend has prevailed among the 10 AFAM undervalued dogs. Aggregate single share price for the AFAM undervalued top 10 declined 4.47% while projected dividends from those 10 invested at $1k each increased 2.82% between January and May.

May aggregate single share stock price for AFAM undervalued 10 dogs lagged total annual dividend returns from $1k invested in each of those stocks by $143.58 or 37.34%. Compared to the Dow in May, these AFAM undervalued 10 dogs showed an 18.82% lower aggregate single share price with 30.97% greater dividends from $1k invested in each than did the dogs of the Dow.

Future articles each month will compare the paths of overbought B+ Barron's 500 dogs with their Low P/E brothers and this group of AFAM undervalued 10 dogs. Stay tuned.

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

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. Unless stated otherwise, 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.