Financial June Dogs: Gains Projected For 2013

by: Fredrik Arnold

As of 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 to a sector containing fewer than 10 dividend paying equities.

Dogs of the Index Metrics Selected 10 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 10 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" (Harper Collins, 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 June 1 & July 2 using to reveal the top 30. Market performance of these 30 selections was then reviewed using four months of historic projected annual dividend history from Yahoo Finance along with annual dividend projections adjusted for market realities.

Thereafter, this article assessed the relative strengths of the financial sector top 10 dividend dogs as of June 1 and July 2 opening prices vs. the Dogs of the Dow May 11 and June 14 stock list. Annual dividends from $1000 invested in the 10 highest-yielding stocks in the sector and index were compared with the aggregate single share prices of the top 10 stocks in each.

Finally, analyst mean target prices and estimated forward looking dividends as reported by Yahoo Finance were used to report estimated price and dividends as of June 2013.

Financial Dividend Dogs

Top 10 financial sector dogs paying the biggest dividend yields in May represented five industries. Top financial sector stock Armour (NYSE:ARR) was one of six REITs in the top 10. Five, American Capital (NASDAQ:AGNC), Armour, Two Harbors (NYSE:TWO), New York Mortgage Trust (NASDAQ:NYMT), and CYS Investments (NYSE:CYS), were residential REITs; Resource (NYSE:RSO) was a retail REIT. The remaining four industries were represented by Arlington Asset Investment (NYSE:AI) an investment brokerage, Invesco (NYSE:IVR) doing investment management, Life Partners (NASDAQ:LPHI) in life insurance, and Banco Santander (NYSE:SAN) a foreign money center bank.

In June Life Partners was replaced by Apollo Residential Mortgage (NYSE:AMTG), which grew the REITs to seven and the residential REITs to six. Also Banco Santander was replaced by American Capital Mortgage (NASDAQ:MTGE), which grew the June REITs to eight and added a diversified REIT to the mix.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top 10 financial sector dividend stocks by yield as of market close 7/2/2012 compared with those of the Dow. Using six months of historic projected annual dividend history from $1000 invested in the 10 highest-yielding stocks each month 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: Financial Dogs Continue A Bull Run

The May financial collection of 10 top dividend payers showed a bear pause (pun intended) as aggregate single share price dropped 9.2% since April with dividends from $1k invested in each of 10 dogs jumping .538%. From January through June however, projected dividends from $1k invested in each of the top 10 dropped 11.62% while aggregate single-share prices soared 52.74%. The financial bull dog run continues.

Meanwhile, the Dow index has stabilized in an overbought pattern where aggregate single-share prices exceed the annual estimated dividends from $1k invested in those 10 by $75 or 18.75% as of June 14.

Financial sector top 10 dogs now show $1099 or 274.53% more dividends (with equally bigger risk) at a $312 or 65.55% lower aggregate share price for the top 10 dogs than those of the Dow as of July 2.

2013 Projects Possible 20.86% Net Gain from 10 Financial Dogs

Top 10 dogs for the financial (Fins) sector were graphed below to show relative strengths by dividend and price as of June 1, 2012, and those projected to June 1, 2013.

Historic prices and actual dividends paid from $1000 invested in the 10 highest-yielding stocks and the aggregate single-share prices of those 10 stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1000 invested in the 10 highest-yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2013 data points green for price and blue for dividends.

Yahoo projected 11.51% lower dividends for this group while price was projected by analysts to increase by 19.94% in the coming year. Probable profit generating trades revealed by Yahoo for 2013 were Armour Residential REIT netting $211.99, Arlington Asset Investment Corporation netting $481.81, and Banco Santander netting $330.61 in the coming year to make the total gain from dividends and swept price gains 20.86% from $10k invested.

A summary will conclude this series of articles each month 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 also for periodic updates on how well or whether the projected gains for 2013 hold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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 (except as noted) are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.