Dogs Of The JP Morgan Sovereigns Index 2011 Summary

Includes: FCX, HON, HSY, LMT, MRK, NSC
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 an existing collection of equities built by the experts.

This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), reveals how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) can 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 JP Morgan Sovereigns index 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 JP Morgan Sovereigns Index

Listed below are the twenty-two JPMorgan Sovereigns Index stocks by yield as of 12/30/11 per Yahoo Finance data. On July 22, 2011, Thomas Lee, an equity strategist with J.P. Morgan, published a note titled "Corporates are the New Sovereigns: 22 stocks to own around sovereign default." The Barron's article covering Lee's announcement defined a Sovereign as an entity which can print money or tax at will. Lee's report listed 22 corporate stocks that show less risk of default than the sovereign U.S. Government, based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by J.P. Morgan, and showing upside to their target prices.

Two of the top ten stocks paying the biggest dividends of the JPMorgan Sovereigns for December were healthcare firms. As for the first nine months of 2011, Merck (NYSE:MRK) topped this list by yield finally forcing LMT off the top. Lockheed Martin (NYSE:LMT) was second with a 4.94% yield.

For these twenty two JPMorgan Sovereign dividend payers, four technology companies, three consumer goods, no financial, five services, two basic materials, two industrial, four health care, no utility, and two conglomerates represent the market sectors.

2011's vertical moves by JP Morgan Sovereigns index dividend payers

MRK rose to the top of the list again in December. Color code shows: (Yellow) firms listed in first position at least once in 2011; (Cyan Blue) firms listed in fifth position at least once in 2011; (Magenta) firms listed in tenth position at least once in 2011; (Green) firms listed in fifteenth position at least once in 2011. Duplicates are depicted in color for highest ranking attained. Until JPM's Thomas Lee updates it, this list is fixed at these same 22 stocks.

Click Charts below to enlarge:

Comparing December to January reveals the top ten dog list shuffle for 2011. Hershey (NYSE:HSY), and Norfolk Southern (NYSE:NSC) in the top ten by yield in January were replaced by Honeywell (NYSE:HON), and Freeport-McMoRan (NYSE:FCX) in December.

Hershey was removed by a 25.09% increase in price coupled with no change in dividend in 2011. Norfolk Southern dropped out due to a 14.16% increase in price plus a 7.27% increase in dividend.

To join the pack of dogs at the top by yield Honeywell had a .26% decline in price coupled with a 12.03% increase in dividend. Freeport-McMoRan experienced a 33.35% decrease in price with no change in dividend.

2011 Dividend VS. Price Results for JPMorgan Sovereigns Index Top 10

Below is a graph of the relative strengths of the top ten JPMorgan Sovereigns index stocks by yield as of December 30, 2011. Twelve 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 December JPMorgan Sovereigns Index component update shows continuation of a $228 gap between aggregate single share prices over projected annual total dividends from $1000 invested in each of the ten highest yielding stocks. The index is still moving in a horizontal direction.

What direction will JPMorgan Sovereigns prices and dividends go in 2012? Stay tuned.

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.

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