Top 10 Basic Materials November Dogs Show Nearly 60% Net Gains

by: Fredrik Arnold

Back in December 2011, this report series began applying dog dividend methodology to reveal possible buy opportunities in each of eight major market sectors: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology and utilities. The ninth conglomerate sector had too few members to report.

Dogs of the Index Metrics Selected Ten Top Basic Materials Stocks

Two key metrics determined the yields that ranked these sector dog stocks: (1) projected annual dividend; (2) stock price. 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 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. Prior to the publication of the O'Higgins book, Dow dogs were known by some market watchers as "fallen angels."

Comparative Methods Used

First, the entire list of basic materials sector companies was sorted by yield as of November 16 using to reveal the top fifty. Market performance of those selections was then reviewed using eight periods of historic projected annual dividend history from Yahoo Finance along with annual dividend projections adjusted for market realities. Then the list was reduced to the top thirty shown.

Thereafter, this article assessed the relative strengths of the basic materials sector top ten dividend dogs as of November 16 closing prices vs. the Dogs of the Dow. Annual dividends from $1000 invested in the ten highest yielding stocks in the sector and index were compared to the aggregate single share prices of the top ten stocks in each.

Finally, to gauge future upside potential, a hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter, one year mean target prices set by analysts multiplied by the number of shares supplemented the dividend amount minus a flat $20 broker fee was used to determine a net gain amount for the five stocks showing the most upside price potential into 2013.

Basic Materials Dividend Dogs

Seven of the top ten basic materials stocks paying the biggest dividends in November represented oil and/or gas industries: Whiting USA Trust I (NYSE:WHX), a driller; SandRidge Mississippian Trust I (NYSE:SDT), an independent; Whiting USA Trust II (WHZ), an independent; Chesapeake Granite Wash Trust (NYSE:CHKR), an independent; Sandridge Permian Trust (NYSE:PER), an independent; VOC Energy Trust (NYSE:VOC), an independent; MV Oil Trust (NYSE:MVO), a driller. Just three of the top ten basic materials firms did not mention oil or gas in their industry description: Great Northern Iron Ore Properties (NYSE:GNI), a steel and iron concern; Oxford Resource Partners (OXF), a metal and minerals firm; Rhino Resource Partners (NYSE:RNO), a nonmetallic mineral miner.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten basic materials dividend sector stocks by yield as of market close 11/16/2012 compared to those of the Dow. 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: Basic Material Dogs Now Bear Meat

The November basic materials collection of top dividend payers resumed the bearish course in price and dividends set since February. Aggregate dividend from $10k invested in each of the top ten stocks have increased at a rate of 38% for the period while aggregate single share price dropped 34%.

Meanwhile, the Dow index continued to show its overbought divergence since February as aggregate single share prices fell 8% while dividends from $1k invested in the top ten increased 3.3%. Dow top ten dogs moved beyond the convergence shown in June to display 2.7% price divergence over dividends in November.

Basic materials sector top ten dogs showed $1137 or 270% more dividends (with equally bigger risk) at a $235 or 54% lower aggregate share price for the top ten dogs than those of the Dow as of November 16.

Conclusion Too:

2013 Projects A Near 60% Net Gain from These 10 dogs

Top ten dogs for the basic materials sector were graphed below to show relative strengths by dividend and price as of November 16, 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 target share prices from Yahoo Finance created the 2013 data points green for price and blue for dividends.

Yahoo projected 27% lower dividends for this group while price was projected to increase by 28% in the coming year.

The number of analysts contributing to the mean target price estimate for each stock is noted in the last column on the charts. Three to nine analysts is considered optimal for a higher probability projection estimate.

Five probable profit generating trades revealed by Yahoo for 2013 were:

Whiting USA Trust I netting $2,456.76, based on estimates from one analyst;

Oxford Resource Partners netting $973.74 based on an estimate from one analyst;

MV Oil Trust netting $771.28 based on an estimate from one analyst;

Rhino Resource Partners netting $527.35, based on estimates from two analysts;

VOC Energy Trust netting $434.55, based on an estimate from one analyst.

The net gain in dividend and price was 59.53% on $10k invested.

Disclosure: I am long T, VZ, CVX, INTC, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.