Dow 30 Index Top Dogs Still Overbought In May

by: Fredrik Arnold

This article reports results for the Dow 30 Index as of June 1 using a once per year trading system triggered by yield, called the "Dogs of the Index" to determine the best of these dividend stocks.

Previous articles in this series reported May results from 3x9 and 1X9+1 Sector indices, the Russell 1000, S&P 500, NYSE International 100, and NASDAQ 100 indices. Upcoming articles this week report dog metrics applied to two additional indices: S&P 500 Aristocrats; JPMorgan New Sovereigns.

Dogs of the Index Metrics

Two key numbers determined the yields that ranked stocks in each index: (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 increase (and whose dividend yields therefore decrease) could be sold off once each year to sweep gains and reinvest seed money into higher yielding stocks in the same index.

Investor Empowerment from the Dow 30

Listed below are the thirty Dow Index stocks by yield as of 6/1/12 per data. CME Group, publisher if this index, states, "The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. indexes, such as the S&P 500 Index providing additional opportunities."

Two technology firms showing the biggest dividend yields on the Dow as of June 1 were: (1) AT&T (NYSE:T); (2) Verizon (NYSE:VZ). The rest of the Dow 10 dogs include three healthcare, one industrial, one financial, two basic materials, and one consumer firm. Thirty Dow stocks include seven technology companies, three consumer goods, four financial, four services, four basic materials, two industrial, three health care, no utilities, and three conglomerates representing the market sectors.

Up and Down Moves for Dow Index Dogs

As it has for the past year, AT&T continues to wear the yellow tint atop this list.

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

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Bullish upward price moves since April 17 were made by only two of the top ten Dow 30 dogs: AT&T Inc. dialed up a 10.24% share price increase; Verizon Communications connected with a 8.95% price bump.

Bearish downward price moves for the same period hit the rest of the dogs of the Dow 30 top ten for April and May: Merck & Company (NYSE:MRK) price decreased 3.18%; Pfizer Inc. (NYSE:PFE) saw share price drop 3.6%; General Electric (NYSE:GE) share price dropped 2.93%; JPMorgan Chase (NYSE:JPM) powered into the top ten by hemorrhaging 26.24%; Chevron (NYSE:CVX) price dropped 7.75%; Intel Corporation (NASDAQ:INTC) showed a price snap of 10.05% but still exited the top ten; Procter & Gamble (NYSE:PG) showed a 7.79% price swoon; Kraft Foods (KFT) price declined just 1.75% and dropped to the thirteenth slot; Dupont (NYSE:DD) showed a 11.38% price fizzle for May and regained slot ten.

Dividend vs. Price Results for Dow 30 Dogs

Relative yield strengths of the top ten Dow 30 Index stocks were graphed as show below as of June 1, 2012. Projected annual dividends 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 of the past six months shown in green for price and blue for dividends.

Conclusion: Overbought Dow Fails to Achieve Parity in May

Dow 30 Index dogs reflected bear market symptoms since February as projected dividend totals for $1000 invested in the top ten increased 3.833% while their aggregate total single share prices dropped 1.27%.

December 30th 2011 marked the last time projected dividends from $1000 in each of the top ten Dow dogs exceeded the aggregated single share price of those ten. March 13 aggregate price came within $8 over dividends. Until dividends exceed price by this standard the Dow will show as overbought. A great bearish drop in aggregate single share price is accompanied by a sizeable increase in projected dividends from $1k invested in the top ten Dow dogs is long overdue.

Will Dow 30 Index bullish price gains and dividend decline continue all summer? Stay tuned.

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, INTC.