Carnevale's Power 25 Index January Dogs Chase Yields

by: Fredrik Arnold

In November respected analyst and Seeking Alpha blogger, Chuck Carnevale published the article Our 25 Dividend Growth Stocks Are Dirt Cheap. Mr. Carnevale's portfolio review listed top 25 blue chip dividend growth stocks (1) available at current valuations that were significantly below their historical norms; and (2) remained profitable through the great recession of 2008 and 2009.

The resulting portfolio of companies he says "offers a three-pronged opportunity for above-average future total returns at below-average risk. We expect that each company will benefit in the future from a potential expansion in their PE ratios coupled with future earnings growth and finally followed by dividend increases offering a return kicker." That article ranked these stocks by 5 year estimated total returns ranging from a high of 38.2% down to 10.8%.

Dogs of the Index Metrics Used to Select The Top Ten Stocks

Two key metrics determine the yields that rank index or 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. Investors select portfolios of five or ten stocks in any one index or sector by yield to trade. They await the results from their investments in the lowest priced, highest yielding stocks they selected and pray that the price of every stock they now own climbs higher (having locked in a high yield percentage at purchase).

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.

Carneval Index Stocks in January

This article ranks the Carnevale 25 list strictly by yields based on estimated annual dividends to find the dogs therein. Numbers after the company names in brackets [x] indicate Mr. Carnevale's ranking for each stock by total estimated returns. Here's the list ranked by yield calculated as of January 13 from Yahoo Finance data:

Mr. Carnevale's top ten stocks paying the biggest dividends as of January 13 included firms representing six market sectors. The top stock is one of two in the service sector, RR Donnelley & Sons (NASDAQ:RRD). The balance of the top ten include two consumer goods, one technology, one basic material, one utility and three healthcare firms. The full list of 25 stocks has five service, five healthcare, three consumer goods, one financial, three basic materials, five industrial, one utility, one technology and no conglomerate representing the market sectors.

Vertical Moves in Carneval Index Stocks

Just one firm, RR Donnelly, has stayed at the top of this list by yield for the four months surveyed. Action takes place in the middle of the list. A notable price gain was made by Home Depot (NYSE:HD) rocketing from eleventh place by yield in October to eighteenth in January, by virtue of a price gain from $35.05 to $43.51 in those four months. Looking at moves down in price and up in yield reveals Walgreen Co. (WAG) rising from twenty first place by yield to seventeenth, as its price dropped from $33.00 in October to $32.63 in January.

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

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Dividend vs. Price Results

Below is a graph of the relative strengths of the top ten Carnevale Power 25 index stocks by yield as of January, 2012. Using four 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.

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Conclusion: Carnevale Dogs Run

This Carnevale collection of 25 powerful dividend payers shows steady market performance during recent unsettled market conditions. Notice the interweaving pattern of of dividends from $1k invested in the top ten sinking below aggregate total single share prices in November and January when prices increased. This index compares favorably with three popular, reliable and low risk indices reported in the dogs of the index series, the NASDAQ 100; Dow 30; S&P 500 Aristocrats.

At the end of each month, a summary concludes this series of articles by showing results of yield and price for these Carnevale Power 25 stocks compared to David Fish's Champions, Contenders, Challengers, and Composite lists.

Disclosure: I am long JNJ, INTC, CVX.

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.