This monthly series adds missing price information referenced in the previous dividend comparison article. This report was inspired in August when a Seeking Alpha reader requested that I "add relative financial data on the companies selected" for my graphs comparing seven indices by annual yield projections. That request led to the development of a simple tool to chart investment risk. The tool is used to gauge relative risks prior to the purchase of any 10 Dogs of the Index stocks with the highest dividend yield at any point during the year.
The Dogs of the Index strategy popularized by Michael B. O'Higgins in "Beating The Dow" (HarperCollins, 1991) reveals how low-yielding stocks with prices that increase (or dividends that 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 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 investors, having selected their portfolios of five or 10 stocks in any one index, are able to follow, trade, and await the results from their investments in the lowest priced, highest yielding stocks selected.
The investment risk tool is constructed on a given date in the following manner:
- Add the single share prices of the top 10 stocks on an index list. Then,
- add the total annual dividend amounts projected from $1000 invested in each of those ten stocks. Finally,
- compare the resulting two numbers.
A standard for comparison of those resulting numbers was established in July, when JPMorgan's Thomas Lee pronounced the JPMorgan list if 22 New Sovereigns to be of lower risk than U.S. Treasury Bonds. The Barron'sarticle covering Lee's announcement defined a Sovereign as an entity that can print money or tax at will. Lee's report listed stocks showing less risk of default at that time than the sovereign U.S. Government based on five-year credit spreads, free cash flow yields exceeding bond yields, ratings of overweight by JPMorgan, and showing upside to their target prices.
Graphs shown for JPMorgan New Sovereign stocks show aggregate 10 single share prices to be higher than projected dividends from $1,000 invested in each of the 10. By that standard of divergence, eight indexes surveyed rank themselves in the following order from high to low over the past few months:
Perhaps this information reviewed monthly can be one step toward Yale economist Robert Shiller's admonishment to "make conservative preparations for possible bad outcomes."
Stocks comprising each Index
The following charts display prices and projected annual dividends for 10 stocks comprising each index surveyed 12/30/11. Yield data for the NASDAQ, and S&P 500 (NYSEARCA:SPY) index stocks is from here. Dow, Russell, Sectors, Aristocrats, NYSE International, and JPMorgan Sovereigns yield data is from Yahoo Finance.
Any variations in dividend projections from identical stocks on separate lists results from the data coming from separate sources. For example PBI's projected annual dividend is listed as $1.50 at $18.54 in the 12/30/11 indexarb.com database used for the S&P 500 Index but as $1.48 at $18.54 for 7.98% yield by the 12/30/11 Yahoo Finance data used for the S&P 500 Aristocrats Index.
You will note that the Dow index figures for December are reported using Yahoo finance numbers instead of the indexarb figures used in previous months. This is so the 2011 closing Dow results would conform with those at dogsofthedow.com.
In December just eight stocks repeat on two lists each: Abbott (NYSE:ABT); American Capital (NASDAQ:AGNC); CenturyLink (NYSE:CTL); Intel (NASDAQ:INTC); Johnson & Johnson (NYSE:JNJ); Merck (NYSE:MRK); Pitney Bowes (NYSE:PBI); AT&T (NYSE:T).
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 10 high-yield stocks (blue points) versus the total prices of one share of each of the 10 stocks (green points) by index. Grouped together the graphs display the comparative gyrations of the eight indices.
(Click charts to expand)
Russell 1000 Index Dogs
These financial and service firms pay big dividends. For December, eight of the top 10 stocks in this index paying the big dividends are financial sector firms. Last month American Capital Agency Corp. again topped this list at 19.94% yield as of 12/30/11. This index divergence dropped more than 200% since November. Here total price paid remains fairly constant (even decreases) for a new basket of higher-yielding stocks each month.
October's drop in yield was caused by the author changing source data based on the larger-cap Russell 1000 index to replace the Russell 2000 index that includes mid caps. Still the downward trend in dividends continued as prices increased for the top two stocks by yield, resulting in fewer shares purchased to generate dividends.
Top Dog Stocks by 3x9 Sectors
Composed of top dividend payers regardless of index and limited to three stocks from each of nine sectors. The top10 was completely shaken up in December and the top dividend payer (according to Yahoo Financial) was disqualified by the author as projecting an unsustainable dividend. Below the disqualified CPI Corp. projecting a 55.25% yield, are representatives of six sectors: two services, two technology, three financial, one basic materials, one industrial, and one utility.
The new default top dog by yield at 24.43% is Alon Holdings Blue Square (NYSE:BSI), another services (grocery) company. Later this month a 1 by 9 plus one Sector report will be introduced featuring the top-yielding stocks in each of the nine sectors plus the best-performing runner up. Those sector dogs will likely show a more conservative trajectory than the current 3 by 9 model.
Annual projected dividend totals for $1000 invested in each stock rocketed away from aggregate total single share prices this month as new high-yielding service sector issues were added to this index.
S&P 500 Index Dogs
Here are the top 10 S&P 500 dividend paying stocks. Frontier Communications (NYSE:FTR) is again tops with 13.18% yield on this index, as of 11/11/11. Dividends from $10,000 invested in top 10 yielding stocks on this index have held well above the aggregated total prices of one share each all year. The tracks diverged widest in August, converging slightly in September, only to diverge again in October, November and December, as prices declined while dividends remained flat or rose.
The S&P 500 December top 10 yield components signaled bullish market divergence with both dividend yields and aggregate total single share prices rising. S&P dog share prices dropped to throw higher yields as a $41.45 priced Reynolds American (NYSE:RAI) stock replaced a $5.75 HCBK stock to add price power to the top10 list as RAI took over 10th place on this list.
NYSE International Index Dogs
Ten European based companies on the NYSE showing the highest dividend yields make up this list. For December, five of the top 10 stocks paying the biggest dividends in this index are technology companies. Nokia (NYSE:NOK) last topped this list in July and edges out Telefonica SA (NYSE:TEF) by 0.13%. NOK is tops again with a 9.96% yield in December.
Dividends from $10,000 invested in top 10 yielding stocks on this index have continuously diverged above the aggregated total prices of one share each all year. Our NYSE International 100 Index component update shows bear market divergence continuing with dividends from $1k invested in the top 10 moving up and away from aggregate total single share prices for the top 10, which remained at exactly the same level.
NASDAQ 100 Index Dogs
Six of the top 10 stocks paying the biggest dividends in this index were technology firms. Vodafone (NASDAQ:VOD) and Seagate Technologies (NASDAQ:STX) have traded places at the top of this list twice over the past seven months of 2011. In December VOD was tops again at 8.38%. The remaining four represented two business sectors with two consumer, and two service companies. Expedia (NASDAQ:EXPD) showed up in fifth position for its first ever appearance on the NASDAQ top 30 by yield at 3.86% as of December 30.
Annual projected dividend totals from $1000 invested in each surpassed the aggregate one share each price totals in June. These tracks achieved maximum divergence in August. The NASDAQ 100 December top 10 yield components signaled somewhat bearish market divergence with annual dividend yields rising as aggregate total single share prices stayed flat.
Dow Industrial Index Dogs
AT&T (T) continues atop this list. Its yield was at 5.98% as of November 11, and at 5.82% December 30, reflecting an $.82 price gain of 2.79%. The Dow Dog dividend versus price history reveals dividends from $10,000 invested as $1,000 each in the top 10 yielding stocks in December, culminated in near convergence as dividends from $1k invested in the top 10 dropped while aggregate total single share prices rose consistently.
S&P 500 Aristocrats Dogs
Ten top yielding stocks from companies paying and increasing dividends each year for 25 years or more make the S&P 500 Index dog list. Pitney Bowes (PBI), took over the top spot from Century Link (CTL). This technology company will be leaving the list in January since CTL failed to raise its dividend in 2011 and broke the 25-year requirement to be listed.
The December S&P 500 Aristocrats Index component update shows no discernible trend for this index except for the horizontal direction. Furthermore Aggregate single share prices for the top 10 stocks converged with projected total annual dividends paid from $1000 invested in each of those top 10 stocks at the $477 level.
JPMorgan New Sovereigns Dogs
These are the top dividend paying stocks that -- a JPMorgan equity strategist says -- 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 JPMorgan, and showing upside to their target prices.
The December JPMorgan Sovereigns Index component update shows a return to a $228 gap of aggregate single share prices over projected annual total dividends from $1000 invested in each of the 10 highest-yielding stocks for this index continuing in a horizontal direction.
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 five or 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 December:
This information will continue to be reviewed monthly as one step toward Robert Shiller's admonishment to "make conservative preparations for possible bad outcomes."
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.