Sizing Up The Financial Sector's January Dogs

by: Fredrik Arnold

Last month this intrepid Dogs of the Index analyst began applying dog dividend methodology to each of eight major market sectors. In alphabetical order these sectors are: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology and utilities.

The ninth sector, conglomerates, according to Yahoo Finance, contains just eight companies, five of which pay dividends. Thus the reporter declined to apply Dogs of the Index metrics to such a limited universe, declaring, "such a task is comparable to a dog show judge trying to evaluate a Chihuahua based on St. Bernard conformation standards."

Dogs of the Index Metrics Used to Select The Top 10 Sector 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 10 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.

Comparative Methods Used

First, the entire list of financial sector companies is sorted by yield as of January 20, using to reveal the top 30. Market performance of these 30 selections is then reviewed using four months of historic projected annual dividend history from Yahoo Finance.

Thereafter, today's article goes on to assess the relative strengths of the financial sector top 10 dividend dogs as of January 20 vs. the Dogs of the Dow January 13, stock list. Annual dividends from $1000 invested in the 10 highest-yielding stocks in the sector and index are compared with the aggregate single share prices of the top 10 stocks in the sector and index.

(Click charts to expand)

Financial Dividend Dogs

The top 10 financial sector stocks paying the biggest dividends in January represent seven industries. Top financial sector stock American Capital (NASDAQ:AGNC) is one of five REITs in the top 10. Three (American Capital , Armour (NYSE:ARR), and Two Harbors (NYSE:TWO) are residential REITs, Chimera (NYSE:CIM) is a diversified REIT, and Resource (NYSE:RSO) is a retail REIT. The remaining five include Life Partners (NASDAQ:LPHI) life insurance, Invesco (NYSE:IVR) mortgage investment, BBVA Banco (NYSE:BFR) foreign regional bank, Arlington (NYSE:AI) investment brokerage, and MCG Capital (NASDAQ:MCGC) asset management in the top ten.

Of the top 30, 16 companies are REITs. Nine are Residential REITs, six are Diversified REITs, and one a Retail REIT. Other financial sector industries represented by more than one company are: diversified investments and asset management, with three; mortgage investment and investment brokerage with two.

Vertical Moves in Financial Dividend Dog Stocks

Going back four months, American Capital claimed the top of this list by yield for the first two months of the quarter, then BBVA Banco rose from 10th place in October, to take the lead by yield in December by virtue of a price drop from $6.69 to $5.15 in two months. January finds AGNC back on top. Meanwhile, the middle and bottom of the list featured the most active shares. For instance, CommonWealth (NYSE:CWH) in November moved from 30th place by yield to 28th by virtue of tanking from $18.90 to $17.43 in one month, then CWH dropped further to 26th place at $16.60 in December, and reversed course in January to blast off the chart with a price boost to $19.17. Also Britton & Koontz moved higher in yield from 30th to 24th place recording a 12%
price decline to $5.94 in December, then rallied to $8.30 to disappear in January. More consistently, Hatteras (NYSE:HTS) gained value overall moving from eighth place at $24.49 in October to seventeenth place at $27.39 in January for a 11.8% gain.

Color code shows: (Yellow) companies listed in first position at least once between October 2011, and January 2012; (Cyan Blue) companies listed in 10th position at least once between October 2011, and January 2012; (Magenta) companies listed in 20th position at least once between October 2011, and January 2012; (Green) companies listed in 30th position at least once between October 2011, and January 2012. Duplicates are depicted in color for highest ranking attained.

Dividend vs. Price Results for Financial vs. Dow Dogs

Below is a graph of the relative strengths of the top 10 financial dividend sector stocks by yield as of January 20, 2012 compared with those of the Dow. Using four months of historic projected annual dividend history from $1000 invested in the 10 highest yielding stocks each month and the total single share prices of those 10 stocks creates the data points for each month shown in green for price and blue for dividends.

Conclusion: This Pack of Wolves Failed to Howl

The January financial collection of 30 dividend payers shows general 19.5% market price decline over the four monthly points surveyed. Dividends from $1k invested in each of the top 10 declined 6% for the period.

Meanwhile, the Dow index moved to within $3.50 of convergence as dividends from $1k invested in the top 10 nearly overlap aggregate total single share prices this month. The financial sector top 10 show huge dividends (with equally huge risk) at nearly $284 lower aggregate share price than the Dow as of January 20.

At the end of each month, two summaries will conclude this new series of articles by showing comparative results of yield and price for all eight sectors reported: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology and utilities.

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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