Monthly David Fish publishes updated Dividend Challenger profiles here on Seeking Alpha. David's dividend challengers are made up of companies that have paid higher dividends for five to nine straight years.
Dogs of the Index Metrics Cull Current Bargains
Given the dividend challengers, this article used two key numbers to rank their stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price declared the percentage yield by which each dog stock was ranked.
Historically, investors utilized this ranking system to select portfolios of five or 10 stocks in any one index to trade. They optimistically 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) can be sold off once each year to sweep gains to reinvest the seed money into higher yielding stocks in the same index.
The top 30 dividend challenger stocks listed below were ranked by yields calculated as of July 31.
(click images to enlarge)
Ten challenger dogs posting the biggest dividend yields in June & July included firms representing four of nine market sectors. The top stock -- Navios Maritime Partners LP (NYSE:NMM) was one of two service firms -- StoneMor Partners LP (NASDAQ:STON) was the other. The only technology firm -- Koninklijke KPN N.V. (OTCPK:KKPNY) -- was second. Dynex Capital Inc. (NYSE:DX) was one of three financial firms, also including PennantPark Investment Corp. (NASDAQ:PNNT), and Triangle Capital Corp. (NYSE:TCAP). Four basic materials firms -- Natural Resource Partners LP (NYSE:NRP); Exterran Partners LP (EXLP); Vanguard Natural Resources LLC (NYSE:VNR); Crestwood Midstream Partners LP (NYSE:CMLP) -- represented the market sector, completing the top 10 dog pound.
Dividend Vs. Price Results
Graphs below show relative strengths of the top 10 dividend challengers' index stocks by yield and price as of July 31, 2012. Six points of historic projected annual dividend history from $1,000 invested in the 10 highest yielding stocks and the total single share prices of those 10 stocks created the patterns shown in green for price and blue for dividends.
Conclusion: Challenger Dividends and Price Dance To Bear Music
This challengers collection by yield showed dividends from $1,000 invested each of the top 10 stocks up 10.14%, while their aggregate single share price went down 28.99% since January. Since May alone, there was a 2.96% pop in projected dividends, while their aggregate single share price dropped 16.94%. Bear blues composed the tune for this dance.
Conclusion Two: Dividend Challengers Herald 19.54% Annual Net Gains
For the coming year, analysts' forecasts from Yahoo Finance projected a 9.98% lower dividend from $1,000 invested in each stock within this challengers top 10 dog group, while the aggregate single share price for the 10 was projected by analysts to increase by 10.82%.
Likely profit generating challengers dog trades one year hence by analysts reported on Yahoo Finance were: Navios Maritime Partners LP, netting $254.92 based on mean target price set by six analysts; Koninklijke KPN N.V., netting $465.54 based on mean target price set by one analyst; PennantPark Investment Corp., netting $227.13 based on a mean target price set by eight analysts; StoneMor Partners LP, netting $266.71 based on a mean target price set by three analysts; Crestwood Midstream Partners LP, netting $259.79 as of next August based on a mean target price set by seven analysts.
The resulting challengers' top 10 dogs net to 2013 from dividends and swept price gains was forecast to be 19.54% from $10,000 invested, according to analysts' mean target price estimates.
Possible Next Steps
As stated above, charts and graphs for this index revealed high yielding stocks whose prices increased (or whose dividends decreased) as candidates to be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index.
At least three investor choices are clear:
(1) Do nothing. Keep checking these high yield opportunities for possible trades in the fourth quarter of the year or after the November elections.
(2) Use the dogs of the index strategy, and select a portfolio of five or 10 stocks from this index to buy now. Await the results from your investments in these lowest priced, highest yielding stocks and pray that the price of every stock you then own climbs higher (having locked in a high yield percentage at purchase). One year from now, review these selections and sweep gains, reinvesting the seed money into new higher yielding stocks in the same index.
(3) Pick one or two of the above listed stocks as candidates to buy now, then hold long term, all the while collecting interest or reinvesting the gains in additional shares through a dividend reinvestment plan.
At the end of each month, a summary concludes this series of articles, showing results of yield and price for the Dow 30, Russell 50, Dividend Achievers, the Carnevale Power 25 and Super 29 indices, along with David Fish's Champions, Contenders, Challengers, and Composite lists. Stay tuned to follow these intrepid dogs.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.