10 Market Selected Russell 1000 Buy Opportunities: Dogs Of The Index Q4 Update

by: Fredrik Arnold

Over the years many investment strategists have recommended dividend paying stocks. Recent articles have investigated and compared projected dividend yields from eight indices in an effort to sort out an answer to the question, "which dividend stocks are good, better, best, bad or ugly?"

Up until now this series of articles has continued to provide information without stating the obvious fact that any portfolio of stocks is only as strong as the grounds for its collection. Much like a building is planned and built to suit its location, so must a stock portfolio be built to suit the owner's purpose.

The Need for Investment Research

Many investors select dividend stocks based on fundamental financial reports from individual companies. This approach is central to the existence of this Seeking Alpha forum. Readers and writers herein can debate and compare the relative merits of their favorite stock picks. This method takes a lot of time and study to determine an answer to the question, "which dividend stocks are good, better, best, bad or ugly?"

Meanwhile, out in the world of finance and publishing, many well-paid financial wizards busy themselves attempting to gain followers and credibility for their chosen collections of equities. These organizations include:

  • Russell Investments, a Washington, USA Corporation, a subsidiary of Northwestern Mutual Life Insurance Company publishes the Russell 1000 index.
  • Standard and Poor's, a division of McGraw Hill, publishes indices including the S&P 500 and the S&P 100.
  • Dow Jones, a CME Group Company, aggregates the Dow Jones Industrial index of 30 stocks selected to represent the market as a whole, which is commonly called the DOW.
  • NASDAQ initials were the acronym for the National Association of Securities Dealers Automated Quotations. It was the nation's first electronic stock exchange.
  • NYSE stands for the New York securities Exchange.
  • CBOT is the Chicago Board of Trade.
  • JPMorgan, Morgan Stanley, Merrill Lynch, Morningstar, Vanguard, Edward Jones, and nearly all investment houses collect lists of equities to serve various market niches.

A Short Cut to Investment Wisdom

October as the start of the fourth Quarter of the year also signals the start of the profit generating equity trading season. The month leads the much quoted "buy in October sell in May" admonition.

As a short-cut to determining the best of the best dividend stocks, many investors rely on a once per year trading system triggered by yield, called the "Dogs of the Index" strategy. This strategy gives the investor the tactical advantage of obtaining all the wisdom and knowledge of the well-paid wizards of investment and publishing for free merely by choosing the existing collection of equities built by the experts.

The charts below reveal low yielding stocks whose prices increase (or whose dividends decrease) to be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index. Two key metrics determine the yields that rank the Russell 1000 dog stocks: (1) Stock Price; (2) Annual Dividend. Dividing the annual dividend by the price of the stock declares the percentage yield by which each dog stock is ranked. Thus the investor is able to follow, trade, and await the results from an investment in the lowest priced, highest yielding five or ten stocks in the index.

Revelations from the Russell 1000 Index for October

Below, then, are the top thirty picks for October served up as of October 7 by Yahoo Finance data as the top dividend yielding stocks listed on the Russell 1000 Index. Russell Investments states its purpose as "improving financial security for people. " The company states that the Russell 1000 Index offers investors access to the extensive large-cap segment of the U.S. Equity universe, representing approximately 90% of the U.S. Market.

Seven of the top ten stocks in this index for October are financial firms paying the biggest dividends. In August and September Invesco Mortgage (NYSE:IVR) topped this list at 22.8% and 23.83%. For the first six months of the year American Capital Agency Corp. (NASDAQ:AGNC) was the leader with yields between 18% and 20%. AGNC is now back on top by virtue of IVR being not listed on the Russell 1000 as of 6/27/2011, the basis for this October update. Of these top thirty Russell 1000 dividend payers, just six are non-financial companies. Two consumer goods, two services, one technology, and one industrial are the non financial sectors represented in the top thirty.

October Changes in Russell 1000 Index Dividend Paying Top 30

Over the first ten months of 2011, three different firms bubbled to the top of the list. Color code shows: (Yellow) firms listed in first position at least once between January and October 2011; (Cyan Blue) firms listed in tenth position at least once between January and October 2011; (Magenta) firms listed in twentieth position at least once between January and October 2011; (Green) firms listed in thirtieth position at least once between January and October 2011. Duplicates are depicted in color for highest ranking attained. Notice how more than two thirds of the Russell stocks disappeared from the list after this October quarterly component update. Gone are IVR, ARR, RSO, TWO, DHT, MCGC, HTGC, AI, PSEC, MFS, FSC, DX, PMT, CODI, CXS, GLAD, PNNT, SLRC, PDLI, TCAP & WAC.

(Click charts to expand)

October Dividend vs. Price Results for Russell 2000 Index Top 10

Below is a graph of the relative strengths of the top ten Russell 1000 index stocks by yield as of October 7, 2011. Using ten months of historic projected annual dividend history from $1000 invested in the ten highest yielding stocks each month and the total single share prices of those ten stocks creates the data points for each month shown in green for price and blue for dividends.

The October Russell 1000 component update forced the Annual projected dividend totals for $1000 invested in the top ten Russell stocks to drop dramatically toward their aggregate total single share prices. Perhaps the bulls will hold sway in the month to come and the share prices will begin to grow up toward the dividend yields. Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.