How Now Dow 30?
Investors have utilized Michael B. O'Higgins' dividend dog ranking system to select portfolios of five or ten stocks in the Dow Index to trade as of the last day in December since 1991, when he wrote the book "Beating The Dow" (HarperCollins). Thereafter dog investors awaited annual results from their investments in the lowest priced, highest yielding stocks and trusted that the price of every stock they now owned would climb higher (having locked in a high yield percentage at purchase).
Now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Incorporating analyst price upside estimates into the dog analysis has expanded the dog stock selection process to include popular growth equities, if so desired.
Investor Empowerment from Dow Dogs
McGraw Hill Financial, publisher of this index, states: "The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average™ and Dow Jones Utility Average™.
While stock selection is not governed by quantitative rules, a stock typically is added to The Dow® only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the indices is also a consideration in the selection process."
Dog Metrics Rated Dow Stocks Two Ways by Yield
Top ten Dow dogs by yield from IndexArb.com after November included five of nine business sectors: technology (3); basic materials (2); conglomerates (1); healthcare (2); consumer goods (2). (Financials, industrial goods & services did not make the top ten and Dow-Jones rates Utilities in a separate index.)
IndexArb describes their dividend estimating strategy thus: "The "Estimated Dividend" for each stock below is our best estimate of the per share amount that will be paid during the next year, beginning on December 31, 2015. Most companies pay dividends on a quarterly frequency; some pay annually or semi-annually. The amount, timing, and growth of each dividend is forecasted from several years of dividend history, provided, of course, that the company has an established track record. Otherwise, the most recent (perceived) dividend policy is extended."
Top ten Dow dogs by yield from Yahoo.com/Finance after November added one in the services sector to replace one in consumer goods. So unlike IndexArb, Yahoo tallied six of nine sectors: three technology firms, two basic materials firms, one conglomerate, one consumer goods firm, two healthcare concerns, and one services firm. It is safe to describe all the Yahoo Finance dividend estimates as "the most recent (perceived) dividend policy... extended."
According to both indexArb.com and Yahoo.com, the top seven firms were all in order. Two Technology firms led their dog teams: Verizon (NYSE:VZ) . Chevron Corp. (NYSE:CVX)  showed the second best dividend yield as of market close December 28. A single conglomerate placed third, Caterpillar Inc. (NYSE:CAT)  per both ranking schemes.
The second technology firm, International Business Machines (NYSE:IBM) placed fourth, and the second basic materials firm, Exxon Mobil Corp. (NYSE:XOM), placed fifth per both indexArb.com and Yahoo.com.
Slot nine changed the balance of the two lists IndexArb put Coca-Cola (NYSE:KO) . but Yahoo had the service sector represented by WalMart Stores (NYSE:WMT)  in that position. However slot ten restored the balance with Cisco Systems (NASDAQ:CSCO)  to complete the dual, December IndexArb/Yahoo, top ten Dow dividend dog lists.
Dividend vs. Price Results for Dow Top 10
Relative strength by yield for the top ten Dow industrial index stocks was graphed below. Ten periods of historic projected annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks and the total single share price of those ten stocks created the data points for each period shown in blue for dividend and green for price.
Actionable Conclusions: Dow Top Dogs (1) Mixed Down Into December per IndexArb, and (2) Retreated Bearishly per Yahoo!
IndexArb Dow dogs mixed down as projected annual dividend from $10k invested as $1K in each of the top ten fell 0.5% since November. At the same time the rampant single share price dropped 0.07% to make the mixed down signal.
Yahoo projected a retreating scenario as their Dow dog line-up, showed a 0.37% higher annual dividend from $10k invested as $1K in each of the top ten, while the aggregate single share price for those ten fell 11% between November 20 and December 28.
The differences between the IndexArb and the Yahoo chart peaks and valleys over time have been caused by the movement of high price stocks with large dividends in and out of the top ten. For example, in November the variation circled around a dogfight for ninth and tenth places. Variations in share price and annual dividends for General Electric Company at about $30/$1 held price and Coca Cola Co. at $42/$1.40 led to far lower prices on the IndexArb list. The Yahoo list, however, was pumped with Wal-Mart Stores at $60 /$2 and McDonald's $114/$3.56. So, the Yahoo price results were higher with dividends lower.
Actionable Conclusion (3): Dow Dogs Are Overbought
The Dow dogs' overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten) showed little change on the IndexArb chart while Yahoo Finance's graph showed the gap shrank. The gap is wider on the yahoo graph due to the WalMart higher price and dividend in the mix instead of Coca-Cola's. The December gap was estimated at $266 or 68% on IndexArb but $292 or 76% per Yahoo Finance.
This gap between high share price and low dividend per $1k invested shows an overbought condition. Meaning, no matter which chart you read, these are low risk and low opportunity Dow dogs. Until the Dow dividend from $10k invested as $1k in each of the top ten stocks exceeds the aggregate single share price of those stocks, market pressure continue on the Dow to shrink the gap.
[I invite you to sign on to my premium site, The Dividend Dog Catcher, to share my discussion about how the Dow (short of tossing out IBM) could return to a "normal" balance where dividends from 10 $1k investments can again exceed the aggregate single share price of those ten stocks.]
Actionable Conclusions: (4): Wall St. Wizards Cast A 10.22% Average Upside; (5) A 9.16% Average Net Gain from All 30 Dow Dogs By December 2016
All thirty dogs from the Dow 30 Industrials were graphed below to show relative strengths by dividend and price as of December 28, 2015 and those projected by analyst mean price target estimates to the same date in 2016.
A hypothetical $1000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2016.
Historic prices and actual dividends paid from $30,000 invested as $1k in each of the stocks and the aggregate single share prices of those thirty stocks divided by 3 created data points for 2015. Projections based on estimated increases in dividend amounts from $1000 invested in the thirty Dow stocks and aggregate 1-year analyst target share prices from Yahoo Finance divided by 3 created the data points for 2016 shown in green for price and blue for dividend.
Analysts reported by Yahoo projected a 7.5% lower dividend from $10K invested as $1k in each dog of this group while aggregate single share price was projected to increase nearly10% in the coming year. With price still being higher than dividend, the analyst forecast predicted Dow dogs extending their overbought condition one year out. (Personally, I think these dogs are still prime for a 25% market correction.)
The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the chart. Three to nine analysts have historically provided the more accurate estimates.
A beta (risk) ranking for each analyst rated stock was provided in the far right column on the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stock price movement opposite of market direction.
Actionable Conclusions: (6) Analysts Allege 10 Dow Upsides Of 10.12% to 36.38% by December 2016
Actionable Conclusion (7): Ten Dow Dividend Dogs Chase 12.85% to 36.48% Net Gains After November 2016
Four of the top yielding dividend Dow dogs were also verified as top gainers for the coming year by analyst 1-year target prices. So, this month, the dog strategy as graded by Wall Street analysts was 40% accurate.
Ten probable profit generating trades from $1k invested in each as revealed by IndexARB.com data by 2016 were:
Apple Inc. (OTC:APPL) was projected to net $364.78 based on a median target price estimate from forty-one analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 1% less than the market as a whole.
Pfizer Inc. was projected to net $219.98 based on dividends plus the median of annual price estimates from sixteen analysts less broker fees. The Beta number showed this estimate subject to volatility 7% more than the market as a whole.
Merck & Co. was projected to net $188.55 based on estimates from nineteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 22% less than the market as a whole.
Cisco Systems was projected to net $184.69 based on dividends plus a median target price estimate from thirty-one analysts less broker fees. The Beta number showed this estimate subject to volatility 16% less than the market as a whole.
United Health Group Inc. (NYSE:UNH) was projected to net $182.32 based on target estimates from twenty-three analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 39% less than the market as a whole.
Boeing Company (NYSE:BA) was projected to net $165.55 based on dividends plus a median target price estimate derived from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 5% more than the market as a whole.
American Express Co. (NYSE:AXP) was projected to net $158.61 based on a median target price estimate from twenty-five analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 12% less than the market as a whole.
Goldman Sachs (NYSE:GS) was projected to net $151.40 based on dividends plus a median target price estimate from twenty-four analysts less broker fees. The Beta number showed this estimate subject to volatility 38% more than the market as a whole.
NIKE (NYSE:NKE) was projected to net $146.20, based on dividends plus a median target price estimate by twenty-eight analysts plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 43% less than the market as a whole.
Chevron Corp. was projected to net $128.52, based on dividend plus median target price estimates from twenty-two analysts less broker fees. The Beta number showed this estimate subject to volatility 27% greater than the market as a whole.
The average net gain in dividend and price less fees was over 18.9% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 6% less than the market as a whole.
5 Small Dogs Of The Dow Saw 31.1% More December Gains per IndexArb, Or 28.8% More per Yahoo, from $5K Invested than From The Same Amount In All Ten Dogs.
This 6.33% higher predicted return came from KO instead of WMT in the 5.
Small Dogs' December Gains per IndexArb
Top ten Dow dogs by yield from IndexArb.com/Finance after November tallied stocks from five of nine sectors: three technology firms, two basic materials firms, two healthcare concerns, plus one conglomerate and two consumer goods firms.
Five Lowest Price High Yield Dow Dogs Delivered 15.92% Vs. 12.14% Net Gains by All Ten by December 28, 2016, per IndexArb
$5000 invested as $1k in each of the five Lowest priced stocks in the top ten dogs of the Dow kennel by yield were predicted by analyst 1-year targets to deliver 31.10% more net gain than the same amount invested in all ten. The second lowest priced top ten dog of the Dow, Pfizer Inc., was projected to deliver the best net gain of 22.00%.
The lowest priced five dogs of the Dow stocks for December 28 were: Cisco Systems; Pfizer Inc.; Coca Cola Co.; Verizon Communications; Merck & Co., with prices ranging from $27.31 to $52.84.
Higher priced five Dow dividend dogs per IndexArb for December 28 were: Caterpillar Inc.; Exxon Mobil Corp.; Procter & Gamble ; Chevron Corp.; International Business Machines, whose prices ranged from $68.58 to $137.61.
This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow.
Small Dogs' December Gains per Yahoo
Top ten Dow dogs by yield from Yahoo.com/Finance after November tallied stocks from six of nine sectors: three technology firms, two basic materials firms, two healthcare concerns, one service, plus one conglomerate and one consumer goods firm.
Five Lowest Price High Yield Dow Dogs Delivered 14.97% Vs. 11.62% Net Gains by All Ten by December 28, 2016, per Yahoo
$5000 invested as $1k in each of the five Lowest priced stocks in the top ten dogs of the Dow kennel by yield were predicted by analyst 1-year targets to deliver 28.82% more net gain than the same amount invested in all ten. The second lowest priced top ten dog of the Dow, Pfizer Inc., was projected to deliver the best net gain of 22.00%.
The lowest priced five dogs of the Dow stocks for December 28 were: Cisco Systems; Pfizer Inc.; Verizon Communications; Merck & Co.; Wal-Mart Stores, with prices ranging from $27.31 to $60.75.
Higher priced five Dow dividend dogs per Yahoo for December 28 were: Caterpillar Inc.; Exxon Mobil Corp.; Procter & Gamble; Chevron Corp. ; International Business Machines , whose prices ranged from $68.58 to $137.61.
This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow.
The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.
A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.
The stocks listed above were suggested only as reference points for a Dow Industrial equities dog dividend stock investment research process in December 2015. These were not recommendations.
See my instablog for specific instructions about how to best apply the dividend dog data featured in this article.
Gains/declines as reported do not factor in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.
Disclaimer: This article is for informational and educational purposes only and should 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 except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.
Disclosure: I am/we are long CSCO, GE, INTC, PFE, VZ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.