Financial Dogs Bounce Back In April

by: Fredrik Arnold

In December 2011 this monthly report series began applying dog dividend methodology 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.

A ninth sector, conglomerates, according to Yahoo Finance, contained just eight firms, five of which paid dividends. Thus it was decided not to apply dogs of the index metrics a sector containing fewer than ten dividend paying equities.

Dogs of the Index Metrics Selected Ten Top Financial Stocks by Yield

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 financial sector companies was sorted by yield as of May 16 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 financial 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.

Financial Dividend Dogs

Top ten financial sector dogs paying the biggest dividend yields in April represented five industries. Top financial sector stock Armour (NYSE:ARR) was one of seven REITs in the top ten. Five, American Capital (NASDAQ:AGNC), Armour, Two Harbors (NYSE:TWO), New York Mortgage Trust (NASDAQ:NYMT), and CYS Investments (NYSE:CYS), were residential REITs; Chimera (NYSE:CIM) was a diversified REIT, and Resource (NYSE:RSO) was a retail REIT. The remaining two industries were represented by Ellington Financial LLC (NYSE:EFC), and Invesco (NYSE:IVR) doing mortgage investment, and Arlington Asset Investment (NYSE:AI), an investment brokerage.

Up and Down Moves by Financial Dividend Dogs

Going back five months, BBVA Banco (NYSE:BFR) rose from tenth place in October to take the lead by yield in December by virtue of a 23% price drop in two months. January found AGNC back on top. February had Armour Residential there. BBVA Banco returned to the top slot in March only to become undone in April by political events in Argentina affecting bank dividend payouts overseas. So ARR came to rule as yellow tinted top dog in April.

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.

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Bullish upward price moves among the top ten dogs since March 30 included eight of the March top ten.

Armour Residential REIT price climbed 2.35%; American Capital Agency increased 3.76%; Two Harbors Investment rose 4.08% in price; Arlington Asset Investment Corporation popped up 3.2%; Resource Capital Corporation jumped 2.67% in price; Invesco Mortgage Capital inclined 3.14% in price; New York Mortgage Trust elevated 1.8%; CYS Investments climbed 3.54%; Ellington Financial appeared in the pack for the fist time but Yahoo charts show EFC price climbing 1.94% for the month; Chimera Investment Corporation popped 4.3%.

Bearish downward price moves for the same period were experienced by just two of the pack: BBVA Banco dropped in price 15.28% and out of the pack with dividends curtailed by politics; MCG Capital Corporation declined 2.32%.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten financial sector dividend 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.

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Conclusion: Financial Dog Prices Bounce Pushing Dividends Down

The April financial collection of ten top dividend payers showed aggregate single share price popping 17.11% since March and price also jumped 29.26% since January. In the past month projected dividends from $1k invested in each of the top ten dropped 6.82% and tumbled 11.52% since January. The bull is back.

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.

As of April 30 financial sector top ten dogs showed $1097 more dividends from $1k invested in each of the top ten stocks by yield (with equally bigger risk) at a $335 lower aggregate share price than those of the Dow.

A monthly summary will soon compare results in yield and price for all eight sectors reported in this series: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

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.

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