Russell 1000 Top Dogs Tagged For 25.52% Annual Gain

by: Fredrik Arnold

This article reports results for the Russell 1000 Index as of July 2. This index was analyzed using a once per year trading system triggered by yield, called the "Dogs of the Index" to determine the best of the best dividend stocks.

A previous article in this series reported three top dogs in nine sectors creating a 3x9 sector index and top-yielding stocks from each of nine business sectors along with the best-yielding runner-up from any sector as the tenth to perfectly diversify a top 10 sector index portfolio, named 1x9+1 sectors index. Upcoming articles in this series report July Dog Metrics applied to six additional indices: NYSE International 100, S&P 500, S&P 500 Aristocrats, Nasdaq 100, Dow 30 Industrials, and JPMorgan New Sovereigns.

Dogs of the Index Metrics

Two key numbers determined the yields to rank the stocks in each index: stock price 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 (HarperCollins, 1991), revealed how low-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.

Investment Wisdom From the Russell 1000

Listed below are the top 30 Russell 1000 stocks by yield as of July 2, 2012 per Yahoo Finance data. Russell Investments states that the Russell 1000 Index offers investors access to the extensive large-cap segment of the U.S. equity universe, representing approximately 90% of the U.S. market.

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The Russell 1000 index is updated annually and the latest June revision is reported here.

Six of the top 10 stocks in this index paying the big dividends as of July 2 were financial sector firms: Chimera Investment (NYSE:CIM) led the top five. Four more financials immediately followed: American Capital Agency (NASDAQ:AGNC), Annaly Capital Management (NYSE:NLY), Hatteras Financial (NYSE:HTS), MFA Financial (NYSE:MFA), and, finally, Ares Capital (NASDAQ:ARCC) in the ninth slot. There were two consumer goods firms: Pitney Bowes (NYSE:PBI) and Hillshire Brands (SLE) (NYSE:HSH). Two technology firms completed the top 10: Frontier Communications (NYSE:FTR) and Windstream (NASDAQ:WIN).

Of the top 30 Russell 1000 dividend payers, 13 represented non-financial companies. Three services, three consumer goods, four technology, two basic materials, and one utility were the five non-financial sectors represented in the June Russell list revision.

Dividend vs. Price Results for Russell 1000 Dogs

Below is a graph of the relative strengths of the top 10 Russell 1000 index stocks by yield as of July 2, 2012. Projected annual dividend history from $1,000 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 of the past five months (shown in green for price and blue for dividends).

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Conclusion, Part One: The Russell Advanced in June

In May, Russell 1000 components showed projected annual dividends from $1,000 invested in the top 10 Russell stocks rising 3.7% as their aggregate single share price also rose 11.35%. Again in June the dividend rose 3.45%, while aggregate single share price also rose 6.93% on the strength of double-digit priced dogs entering the top 10 replacing single-digit dogs in the June revision. Since January this index has been bullish as dividends from $1,000 invested in each of the top 10 stocks declined 11.99%, while single share prices for those stocks inclined 11.11%.

Conclusion, Part Two: Analysts Forecast July 2013 Gains Up to 25.52% for Russell Dogs

Top 10 dogs for the Russell 1000 components list were graphed below to show relative strengths by dividend and price as of July 2, 2012, and those projected to July 2, 2013.

Historic prices and actual dividends paid from $1,000 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 $1,000 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).

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For the coming year, Yahoo Finance projected a 10.64% lower dividend from $1,000 invested in each stock within this group, while aggregate single share price for the 10 was projected by analysts to increase by 14.58%. Probable profit generating trades one year from now, revealed by Yahoo, were Pitney Bowes (netting $389.50 based on mean target price set by four analysts), Frontier Communications (netting $407.42 based on mean target price set by 14 analysts), Windstream (netting $279.09 based on mean target price set by 13 analysts), Ares Capital (netting $130.88 based on mean target price set by 14 analysts), and Hillshire Brands (netting $671.93 as of next July based on mean target price set by eight analysts). The resulting net gain from dividends and swept price gains was 25.52% from $10,000 invested according to analyst estimates.

Will the Russell 1000 price gains continue through the summer or will they pull back? Stay tuned also for periodic updates on how well or whether 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 should 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.