Basic Materials Sector Dog Prices Sink In April

by: Fredrik Arnold

This monthly report series was initiated in December 2011 with dog dividend methodology being applied to each of eight major market sectors. In alphabetical order those sectors were: 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 paid dividends. Thus the reporter declined to apply dogs of the index metrics to a sector containing fewer than ten dividend equities.

Dogs of the Index Metrics Selected Ten Top Basic Materials Stocks

Two key metrics determined the yields that ranked these 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.

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).

This 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 increased (and whose dividend yields therefore decreased) could be sold off once a 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 basic materials sector companies was sorted by yield as of April 5 using 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 along with annual divided projections adjusted for market realities.

Thereafter, this article assessed the relative strengths of the basic materials sector top ten dividend dogs as of May 1 opening prices vs. the Dogs of the Dow May 11 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 each.

Basic Materials Dividend Dogs

Top ten basic materials stocks paying the biggest dividends in April mostly represented the oil and/or gas industry: Whiting (NYSE:WHX), Ferrellgas (NYSE:FGP), Enerplus (NYSE:ERF), QR Energy (NYSE:QRE), BreitBurn (BBEP), Sandridge Permian Trust (NYSE:PER), Pengrowth Energy (NYSE:PGH). Only three of the top ten basic materials firms do not mention oil or gas in their industry description: Great Northern (NYSE:GNI); Oxford (OXF); Rhino (NYSE:RNO).

Up and Down Moves by Basic Materials Dogs

In the past four months, two firms- one oil and gas and one steel and iron- claimed the top of this list by yield. One oil and gas firm, Torch Energy (NYSE:TRU-OLD), slid off the top 30 list in January based on a revised annual dividend forecast of $.17 per share, leaving the top to the steel and iron company, Great Northern. In February, Whiting USA Trust's price declined 5.3%, resulting in a marked bump in yield. Meanwhile, Great Northern Iron's annual dividend projection was adjusted to equal that paid in 2011, while its share price increased 1.27%, allowing Whiting to reclaim the lead. In March and April, Whiting retained the yellow color tinted top dog title in Basic Materials.

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

Bullish upward price moves among the top ten dogs since March 30 included half the Basic Materials kennel: Top dog Whiting share price gushed 6.65%; Ferrellgas Partners lit up 1.41%; Rhino Resource Partners price popped .791%; SandRidge Permian Trust jumped 5.33%; BreitBurn Energy Partners price swelled .368%.

Bearish downward price moves for the same period were experienced by the rest of the pack, plus one which fell off the list: Great Northern Iron Ore Properties declined 29.95% in price; Oxford Resource Partners drilled a 5.06% price decline; Enerplus Corporation dropped 10.34%; Pengrowth Energy Corporation tanked 1.1%; QR Energy leaped into the top ten sporting a 11.775% price drop replacing YPF Sociedad Annima (NYSE:YPF) whose price fell 34.6% while its dividend payout was cut to zero due to political issues in Argentina.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten basic materials dividend sector stocks by yield as of market close 5/1/2012 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.

Conclusion: Basic Material Dogs Gripped by a Bear

The April basic materials collection of mainly oil and gas dividend payers reversed course in February. This sector came under a bear attack as aggregate dividends from $10k invested in each of the top ten stocks increased 8.775% between February 24 and April 30 while aggregate prices fell 30.23% for the period.

Meanwhile, the Dow index moved back to near convergence as dividends from $1k invested in the top ten came to within $8 of their aggregate total single share prices in March. Since then, however, the Dow aggregate single share price for the top ten has rallied up 17.56% into May.

Basic materials sector top ten dogs now show $749 or 185.62% more dividends (with equally bigger risk) at a $233 or 52.18% lower aggregate share price for the top ten dogs than those of the Dow as of April 30.

Two summaries will conclude this new series of articles at the end of each month, 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. Stay tuned.

Disclosure: I am long T, VZ, 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.