Basic Materials And Energy Dogs: Top 10 Net 43.75% Gains By February 2014

by: Fredrik Arnold

This report series started in the fall of 2011 by applying dog dividend methodology to reveal possible buy opportunities in each of eight major market sectors as listed by Yahoo Finance: 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/Energy Stocks

Two key metrics determined the yields that ranked the 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).

Comparative Methods Revised

Previous posts began by sorting the entire list of basic materials sector companies by yield using to reveal the top fifty. Recently Ycharts migrated to an eleven sector list that no longer conformed to the Yahoo nine sector classes: basic materials, communication services, consumer cyclical, consumer defensive, energy, financial services, healthcare, industrials, services, real estate, technology, and utilities. In so doing the former nine sector basic materials stock list was split into two new categories labeled (1) energy, and (2) basic materials.

First, to prepare this article, the entire Ycharts list of energy sector companies was sorted by yield as of February 4 to reveal the top twenty. Second, the entire list of Ycharts basic materials sector companies was sorted the same way. 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 lists were combined and reduced to the top thirty as shown below.

Thereafter, this article assessed the relative strengths of the basic materials/energy sector top ten dividend dogs as of February 4 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 to determine a net gain amount for the five stocks showing the highest upside price potential into 2014. The number of analysts providing price estimates was noted for each stock. Three to nine analysts was considered optimal for a valid mean target price estimate.

Basic Materials/Energy Dividend Dogs

Six of the top ten basic materials/energy stocks paying top dividend yields as of February 4 represented oil and/or gas (energy) industries: Whiting USA Trust I (NYSE:WHX), a driller was tops; SandRidge Mississippian Trust I (NYSE:SDT), an independent was in fourth position; Sandridge Permian Trust (NYSE:PER), an independent, was fifth; BP Prudhoe Bay Royalty Trust (NYSE:BPT), a marketer, was eighth; LRR Energy (NYSE:LRE), an independent, was ninth; QR Energy (NYSE:QRE), an independent, was tenth.

Just four of the top ten basic materials/energy firms did not mention oil or gas in their industry description: Great Northern Iron Ore Properties (NYSE:GNI), a steel and iron concern. took second place on the list; Armstrong World Industries (NYSE:AWI), a building materials firm, was third; Rhino Resource Partners (NYSE:RNO), a nonmetallic mineral miner, was sixth; Boise (NYSE:BZ) a paper goods firm was in seventh place.

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten basic materials/energy dividend sector stocks by yield as of market close 2/4/2013 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.

Actionable Conclusion: Basic Material/Energy Dogs Push Dividend to New High

February's basic material/energy collection of dividend payers reversed a bullish course set in January. Aggregate dividend from $10k invested in each of the top ten stocks jumped at a rate of 21.7% since December, while total single share price climbed 52.6% in that period. The market signal became mixed as both aggregate share price and dividend from $1k invested in each stock jumped up in the period.

Meanwhile, the Dow index resumed its overbought divergence as dividend from $1k invested in the top ten dropped 2.8% while aggregate single share price rose 3.3% since January. Dow top ten dogs moved beyond the near convergence shown in January to display 15.8% aggregate share price divergence above dividend from $1k invested in each stock as of February 4.

Basic materials/energy sector top ten dogs showed $1227.58 or 314.7% more dividends (with equally bigger risk) at a $127 or 29% lower aggregate share price for the top ten dogs than those of the Dow as of February 4.

Actionable Conclusion Too: Analysts See 43.75% Net Gain from These 10 Dogs Come 2014

Top ten dogs for the basic materials/energy sector were graphed below to show relative strengths by dividend and price as of January 4, 2013 and those projected by analyst mean price target estimates to the same date in 2014.

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 2013. 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 2014 data points green for price and blue for dividends.

Yahoo projected a 19% lower dividend from $10K invested in this group while aggregate single share price for the ten was projected to increase by nearly 8% 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 valid projection estimate.

Five probable profit generating trades revealed by Yahoo for 2014 were:

Whiting USA Trust I netting $2,369.69, based on estimates from one analyst. [Note: Whiting Petroleum cautions that this trust will expire in August 2015 when the trust petroleum reserves are expected to be produced and sold. At that time the value of shares will drop to zero and there will be a final cash distribution to owners.]

Rhino Resource Partners netting $334.88 based on an estimate from one analyst;

Boise netting $330.54, based on estimates from four analysts;

LRR Energy netting $269.86, based on estimates from six analysts.

QR Energy netting $245.86 based on estimates from eleven analysts.

The net gain in dividend and price was 43.75% on $10k invested in these five dogs.

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 am long T, VZ, INTC, GE, MCD, JNJ, MSFT, DD, PFE. 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.