October Dog Show: Corrections To 30 3x9 Sector Dividend Buys

by: Fredrik Arnold

Thoughtful and direct feedback from motivated readers, followers, and fellow authors on this Seeking Alpha site is as valuable as the articles themselves. This I learned again when Seeking Alpha readers and followers came forward to dispute first published results for my Sectors 3x9 Article entitled '10 Market Selected Sector Dividend Buy Opportunities: Dogs Of The Index Q4 Update' published October 24.

First, rkrakau wrote to comment that DHT Holdings (NYSE:DHT) was listed as a financial instead of a service firm. He added, "When I see a red flag like that I just ignore the rest of the data." I invited him to keep reading and let me know if he found any other mistakes. He didn't. However, on November 4 Tim Eriksen advised me that Vodaphone (NASDAQ:VOD) "did not trade at $16.25 on October 14. The high was $27.65 and the low $27.36."

Of course, Mr. Eriksen was right. So I reviewed my tabular data and discovered: "First, the table was based (mostly) on prices as of 10/7/11 and not 10/14. Second the VOD share price was off by $10.00! Since these calculations are generated manually, I bear full responsibility for my typing a 1 instead of a 2."

These revelations triggered a cascde of alterations to the list I published October 24 to reveal the top dividend yielding stocks in all nine business sectors. First, making DHT a service sector entry booted Stonemor Partners (NYSE:STON) as the #3 service stock off the list and opened a slot for financial firm Armour Residential (NYSE:ARR) to return. Second, VOD's actual share price pushed it off. Finally, discovering that the 10/14 prices for most of the Sector Stocks were inaccurate led me to submit the following corrected October charts and graphs for the 3x9 Sector Index:

Two key metrics determine the yields that rank the 3x9 Sector 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 3x9 Sector Index for October

Below are the revised top thirty picks for October, served up as of October 14 by Yahoo Finance data as the top dividend yielding stocks listed on the 3x9 Sector Index. This collection of 27 stocks is derived by selecting the top 3 dividend yielding stocks in each of nine business sectors: Basic Materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities. (In January of 2012 one top yielding stock from each sector will be selected for the nine top Dogs or the 3x9 Sector Index along with the best yielding runner-up from any sector to be the tenth. This change is expected to perfectly diversify the top ten portfolio.)

Note that the rankings of 1, 2, or 3 for the nine sectors indicate the relative positions of the stocks in each sector as of October 7:

This month the top ten dividend paying stocks in this index represent four sectors: three Financials, three Basic Materials, two Technologies, and two Services. The top dividend yielding stock has been secured by a newly listed service firm, DHT, replacing IVR in October.

October Changes in 3x9 Sector Index Dividend Paying Top 27

Over the past ten months three different firms have 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 September 2011; (Magenta) firms listed in nineteenth position at least once between January and September 2011; (Green) firms listed in twenty seventh position at least once between January and September 2011. Duplicates are depicted in color for highest ranking attained.

Notice how many stocks come and go from the list after quarterly component updates:

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Gone in March were half the components LZR, PSEC, CHKE, PBI, AEE, CINF, NGG, MRK, PFE, SCCO, DD, BA, UTX, & CAT, replaced by IVR, CIM, GNI, CQP, FTR, AZN, BTI, GSK, LO, PPL, FE, LMT, WM, & CLX.

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In April the top three dividend yielders for each of the nine sectors were again updated with just two changes: CIM & LO were replaced by PBI and TEG.

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The July quarterly update removed nearly one third of the components HIMX, RSO, VGR, POM, RRD, TEG FE, & GSK which were replaced by ARR, ALSK, PDLI, VLCCF, NGG, MO, AEE, & DUK.

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Now, in October, exactly one third of the components again were shuffled. Gone are IVR, DUK, AEE, WM, ECOL, AZN, STON, CLX & BTI replaced by DHT, CIM, CMC, EOC, GSK, RYN, RTN, VGR, & POM.

October Dividend vs. Price Results for 3x9 Sector Index Top Dividend Paying 10

A new yield leader DHT Holdings tops this list at 20.73% Yield in October. Annual projected dividend totals for $1000 invested in each stock blew away the aggregate total single share prices again this month, and have continued to diverge further with a decrease in total single share price accompanied by a greater increase in annual dividend yields from $1000 invested in each of the top ten. This divergence is caused by lower priced stocks with high dividends replacing stocks on the list whose prices increased, thus reducing their yield percentage.

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Perhaps the Annual projected dividend totals for $1000 invested in the top ten 3X9 Sector stocks will begin to converge toward the aggregate total single share prices in November. It will likely take the return of a long run bull market. The horizontal chop with a bear twist keeps widening the gap. Stay tuned.

Dividend Yields for 80 Index Leading Stocks

Comparing the relative strengths of eight stock indices by yield using eight months of historic projected annual dividend history from $1000 invested in the ten highest yielding stocks in each index. The corrected 3X9 Sectors leaped to the top in October by virtue of the reported changeover from Russell 2000 to higher cap Russell 1000 stocks in that index.

Annual Dividends Forecast from $1k Invested in each of 10 Top Yielding Stocks in 8 Indices

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Dividend vs. Price Tests for 80 Index Leading Stocks

The investment risk tool is constructed on a given date in the following manner: (1) Add the single share prices of the top ten stocks on an index list. Then, (2) add the total annual dividend amounts projected from $1000 invested in each of those ten stocks. Finally, (3) compare the resulting two numbers.

Graphing Dividends vs. Price

Each graph below shows monthly points of comparison between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten high yield stocks (blue points) versus the total prices of one share of each of the ten stocks (green points) by index. Grouped together, the graphs display the comparative gyrations of the eight indices.

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Two reader observations of inaccuracies in my original October 3x9 Sectors article led to the revisions posted above.

Finally, a reader request to "add relative financial data on the companies selected" for my August article comparing seven sectors by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 10 Dogs of the Index stocks at any point during the year. Using JPMorgan's New Sovereigns as the baseline standard of divergence, the eight indexes surveyed rank themselves in the following order from high to low risk in October:

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This information will continue to be reviewed monthly as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."

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.