A previous article in this series introduced the top ten dogs (by yield) out of 51 in a Defensive Sector Index list cobbled together by screening three lists of companies with market caps over $5 billion: (1) Morningstar's Consumer Defensive Sector (ConDef) list; (2) YChart's Utilities Sector (Utility) list; (3) YChart's Healthcare Sector (Health) list. Seventeen highest yielding dividend stocks from each of those three lists were analyzed using a once per year trading system triggered by yield, called the "Dogs of the Index" to determine the ten best of the best of these 51 Defensive Sector Index stocks.
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 the seed money into higher yielding stocks in the same index. Charts below display a snapshot of the newly created Defensive Sector Index as of October 12, 2012 to 2013.
Modified Dogs of the Index Metrics Selected Ten Top Net Gain Defensive Sector Index Stocks
A recent Seeking Alpha article by David Hunkar touted a different loose collection of these defensive dogs, stating:
Defensive sectors outperform over the long-term due to the compounding effect of dividends and stable growth, and they are also relatively less affected by economic cycles. For example, regardless of the state of the economy, consumers buy food, toothpaste, drugs and use electricity, [cigarettes], etc. Companies operating in the sector are usually well-established and have strong cash-flows which helps to make consistent dividend payments and also dividend increases occasionally.
Listed below are the 51 defensive index dog stocks by net gain as of 10/12/12 per Yahoo Finance data. Market performance of these fifty one selections was reviewed using ten months of projected annual dividend history from Yahoo Finance along with annual dividend projections adjusted for market realities.
These equities were then ranked using the two key dog performance metrics: (1) annual projected dividend; (2) stock price. Dividing the annual dividend by the price declared the percentage yield by which each dividend dog stock was primarily ranked. Then, (3) one year mean target price estimates by analysts supplemented 31 equities that showed significantly higher prices for 2013.
A hypothetical $1000 investment in each equity was divided by the current share price to find a number of shares purchased. The number of shares was then multiplied by a projected annual per share dividend amount to find a dividend return dollar amount. Thereafter, one year mean target prices multiplied by number of shares were added to the forecast dividend amount minus a flat $20 broker fee to determine a net gain amount for those 31 stocks showing upside price gains into 2013.
Top Net Gain Defensive Sector Dividend Dogs
The top ten defensive index dog stocks ranked by 2013 net gains encompass all three sectors. Top dog, Herbalife (HLF) is one of 4 in healthcare. It is followed by the first of three utilities representatives, CPFL Energia (CPL).
Two more utilities firms show up thereafter: Exelon Corporation (EXC); Empresa Nacional de Electrical [Chile] (EOC). The lowest two defensive consumer firms, Reynolds American (RAI), and Altria Group (MO) are bracketed by two remaining healthcare firms, GlaxoSmithKline (GSK), and Sanofi (SNY). This completes top ten defensive index stocks targeted net gain dogs as selected by analysts. Give them all a good yummy rub!
A cynical observer of the above list might see American obsessions with health, energy, and smoking created an endless cycle of consumption. Thus this top ten defensive list might be considered offensive by that observer.
Dividend vs. Price Results
Relative strengths of the top ten defensive index dog stocks were displayed below by net gain as of market close 10/12/2012. Historic projected annual dividend history from $1000 invested in each of the ten highest yielding stocks and the total single share prices of those ten stocks created the data points shown in green for price and blue for dividends.
Conclusion: Top Net Gain Defensive Dogs Go Bullish
The post-September collection of defensive dog equities filtered for maximum net gains restored a bullish trend that began in January but was interrupted between July and September, as measured by dividend vs. price performance. Aggregate single share price for the top ten is up 34% since January. Meanwhile projected dividends from those top ten invested at $1k each decreased 21% since then.
Defensive dog net gainers moved past convergence into an overbought condition in October as aggregate total single share price rose 3.4% while dividends from $1k invested in the top ten fell 18% to move past convergence by $25.
2013 Anticipates nearly 24% Net Gain from These 10 dogs
Top ten defensive dog net gainers were graphed below to show relative strengths by dividend and price as of October 12, 2012 and those projected by analyst mean price target estimates to the same date in 2013.
Historic prices and actual dividends paid from $1000 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 $1000 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. Note: one year target estimated prices at or below current price were not included in the tally.
For the coming year, Yahoo Finance projected a 16% lower dividend from $1k invested in each stock within this top net defensive group while aggregate single share price for the ten was projected by analysts to increase 21%.
The ten most probable profit generating trades per $1k invested as revealed by Yahoo Finance for 2013 were:
Herbalife netting $507.16 based of mean target pricing set by 8 analysts;
CPFL Energia netting $469.78 based of mean target pricing set by 1 analyst;
Teva Pharmaceutical Industries netting $245.21 based on mean target pricing set by 21 analysts;
Lorillard netting $239.89 based of mean target pricing set by 10 analysts;
Exelon Corporation netting $ $214.28 based of mean target pricing set by 16 analysts;
Empresa Nacional de Electricidad S.A. [Chile] netting $187.22 based on mean target pricing set by 4 analysts;
GlaxoSmithKline netting $149.76 based on mean target pricing set by 3 analysts;
Reynolds American netting $134.36 based on mean target pricing set by 10 analysts;
Altria Group netting $129.76 based on mean target pricing set by 11 analysts;
Sanofi netting $114.08 as of next October based on a mean target price set by 2 analysts.
This portfolio of defensive dividend paying stocks based on analyst one year mean price target estimates revealed a configuration of equities estimated to net a return 23.91% versus a 5.76% return from dividends alone. This result is calculated to be 63% more rewarding than that detailed in the "Dogs of the Index" strategy described in a separate article titled: "Introducing Defensive Sector Top Dividend Dogs".
You are invited to check it out.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.