Dogs Of The Sectors Index: 2011 Recap

by: Fredrik Arnold

To determine 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.

Charts below for the 3x9 Sectors Index reveal low yielding stocks whose prices increase (or whose dividends decrease) as candidates to be sold off once each year in order 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 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.

Instant investment wisdom from the 3x9 Sectors

Listed below are the top twenty-seven 3x9 Sector stocks by yield as of 12/3011 per Yahoo Finance data. This data is controversial, since it reports estimated annual dividends that may or not be paid depending on decisions by individual corporate governing boards.

Last week, I applied dog dividend methodology in a new forward test of the Dogs of the Index metrics to each of eight major market sectors: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities. This index is derived from data reported in those articles.

Note that the rankings of 1, 2, or 3 for the nine sectors indicate the relative positions of the stocks in each sector as reported by Yahoo Finance on December 30 (click images to enlarge):

For December, the top ten dividend paying stocks in this index represent five sectors: three in services, two in technology, three financial, one in basic materials, and one industrial. The top dividend yield slot has been abandoned by last month's financial firm, Chimera Investment Corp. (NYSE:CIM), as a result of utilizing new sector data from last weeks articles. Instead of three financial firms, three service firms now perch at the top by yield.

2011's vertical moves by 3x9 Sector index dividend payers

Over the past twelve months, five different firms have now bubbled to the top of the list. Also the firm now residing in tenth position was at the top of the list by yield last month -- CIM.

Color code shows: (Yellow) firms listed in first position at least once between January and December 2011; (Cyan Blue) firms listed in tenth position at least once between January and December 2011; (Magenta) firms listed in nineteenth position at least once between January and December 2011; (Green) firms listed in twenty seventh position at least once between January and December 2011. Duplicates are depicted in color for highest ranking attained.

Click to enlarge.

2011 dividend vs. price results for 3x9 Sector index top 10

Below is a graph of the relative strengths of the top ten 3x9 Sector index stocks by yield as of December 30, 2011. Twelve months of historic projected annual dividend history from $1,000 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.

December's update of components forced annual projected dividend totals for $1,000 invested in the top ten Russell stocks to rocket dramatically away from their aggregate total single share prices. A big factor in this drama is the likely unsustainable 55.25% yield projected by Yahoo Finance for top dog CPY.

The bear did hold sway again in December and 3x9 Sector dividend yields popped as stock prices decreased.

Will price gains ever be rampant in the 3x9 Sectors in 2012? 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. Prices and returns on equities in this article are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.

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