Dow Dog Analysts Forecast Up To 10.48% Annual Net Gains

Includes: CVX, DD, GE, JNJ, JPM, MRK, PFE, PG, T, VZ
by: Fredrik Arnold

This article reports results for the Dow 30 Index as of July 2 using "Dogs of the Index," a once per year trading system triggered by yield, to determine the most lucrative of these dividend stocks.

Previous articles in this series reported June results from two sector indices, plus 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 and JPMorgan New Sovereigns.

Dogs of the Index Metrics

Two key numbers determined the yields that ranked stocks in each index: (1) stock price, and (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 Dow 30

Listed below are the 30 Dow Index stocks by yield as of 7/2/12 per data. CME Group, publisher of 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."

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The June, Dow featured six of nine business sectors in the top ten by yield. Two technology firms showed the biggest dividend yields on the Dow as of July 2: AT&T (NYSE:T) and Verizon Communications (NYSE:VZ). These two top dogs were followed by three healthcare firms: Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Johnson & Johnson (NYSE:JNJ). One consumer goods firm made the top ten list, Procter & Gamble (NYSE:PG). One industrial goods firm, General Electric (NYSE:GE), was included. One financial, JPMorgan Chase (NYSE:JPM) placed eighth. Finally, two basic materials, Chevron (NYSE:CVX), and Dupont (NYSE:DD), rounded out the top ten Dow dogs.

The full list of thirty Dow stocks included seven technology companies, two consumer goods, four financial, five services, four basic materials, three industrial goods, three healthcare, no utilities, and two conglomerates representing market sectors.

Dividend vs. Price Results for Dow 30 Dogs

Relative yield strengths of the top ten Dow 30 Index stocks were graphed as shown below as of July 2, 2012. Projected annual dividends from $1,000 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).

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Conclusion: Overbought Dow Rises With Bullish Verve

Dow 30 Index dogs reflected bull market symptoms since May, as projected dividend totals for $1,000 invested in the top ten dropped 6.57%, while their aggregate total single share prices popped 7.9%.

December 30, 2011 marked the last time projected dividends from $1,000 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, the Dow will show as overbought. A great bearish drop in aggregate single share price accompanied by a sizable increase in projected dividends from $1,000 invested is long overdue for the top ten Dow dogs.

Conclusion, Part 2: Analysts Forecast July 2013 Net Gains up to 10.48% for Dow Dogs

Top ten dogs for the Dow Index component 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 ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1,000 invested in the ten 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 7.09% lower dividend from $1,000 invested in each stock within this group while aggregate single share price for the ten was projected by analysts to increase by 9.74%.

Probable profit generating Dow dog trades one year from now revealed by analysts as reported by Yahoo Finance were: Pfizer netting $133.91 based on mean target price set by 16 analysts; Johnson & Johnson netting $117.66 based on mean target price set by 16 analysts; JPMorgan Chase netting $255.63 based on mean target price set by 29 analysts; Chevron netting $151.55 based on mean target price set by 17 analysts; Dupont netting $177.45 as of next July based on mean target price set by 15 analysts.

The resulting top ten Dow dog net gain to 2013 from dividends and swept price gains was 10.48% from $10,000 invested according to analyst estimates.

Will Dow Index dog price gains continue through the summer or will they pull back? Look also for periodic updates on how well or whether analyst projected 10.5% gains for the Dow dogs in 2013 hold.

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

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.