What is a dividend dog?
The "dog" moniker is earned in three steps: (1) any stock paying a reliable, repeating dividend (2) whose price has fallen to a point where its yield (dividend/price) (3) has grown higher than its peers (such as this safe dividend collection), is so tagged. Thus, the highest yielding stocks in any collection become known as "dogs."
Safety Tested June Dogs
Of course there's no guarantee that any dividend ruled by a cranky board of directors is safe. However, following the traditional logic that if the company has the cash, they'll cough up the promised dividend, the following test was applied to find and rank 50 "safe" dividend stocks.
Free cash flow yield for these companies was found by dividing their free cash flow by stock price. As long as that number exceeded dividend yield (annual dividend/stock price), the stock showed a margin of safety which was measured by subtracting the dividend yield from the free cash flow yield.
Results from that data charted below showed four of nine business sectors represented by ten top yield SafeStox: three basic materials; two service; four financials; one utility. In the Morningstar scheme of eleven sectors, the top ten SafeStox covered six: two basic materials; one industrial; four financial services; one energy; one consumer cyclical; one utility. Those ten stocks posted yields averaging 4.8%.
Actionable conclusions by yield, target price upsides, and net gains were drawn below as top SafeStox dog selections for June were examined, step by step.
Actionable Conclusion (1) Ten Safety Cushioned Dogs Showed 4.41% to 5.68% Yields
This article was written to reveal bargain stocks to buy and hold up to one full year. See Dow 30 article for explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates expanded the stock universe to include popular growth equities, as desired.
These 50 safestox dogs represent all eleven Morningstar sectors but only eight of nine traditional sectors because the only conglomerate (NYSE:CAT) was ceded to the Dow list.
Safe Dog Metrics Determined 50 SafeStox by Margin of Cash Cushion Ranging 0.89% To 56.37%
YCharts screened for stocks yielding 3% or better with market caps over $200M and found these 50 with free cash flow yield exceeding dividend yield.
As mentioned previously, 50 safestox dogs represent all eleven Morningstar sectors. The top ten dogs on the safe stocks list by margin represented four of those sectors: six in financial services, one basic materials, two industrials, and one utility.
Top dog Canadian Imperial Bank. (NYSE:CM)  was tops of the six financial services firms. Other financials placed second, third, fifth, sixth, and eighth: Bank of Nova Scotia (NYSE:BMS) ; Shinhan Financial Group (NYSE:SHG) ; Royal Bank of Canada (NYSE:RY) ; Moelis & Co (NYSE:MC) ; Manulife Financial (NYSE:MFC) .
Fourth place was secured by a basic materials sector representative, Schnitzer Steel Industries (NASDAQ:SCHN) . Seventh and ninth positions were taken by two industrial firms, Greenbrier Companies (NYSE:GBX) , and Quad/Graphics (NYSE:QUAD) .
The last of the top ten safestox was a utility in tenth place, NextEra Energy Partners (NYSEMKT:NEP) , which completed the top ten safest dogs by margin for June.
Dow Dogs By Margin Qualified 24 As Safe.
Top ten Dow dogs by margin of cash flow yield over dividends found represented five Morningstar sectors: three in financial services, four in technology, and one each in industrial, consumer defensive, and healthcare.
The three financial service Dow leaders by safety margin were American Express (NYSE:AXP) , JPMorgan Chase (NYSE:JPM) , and Travelers Companies (NYSE:TRV) . Four in technology were Apple (NASDAQ:AAPL) , IBM (NYSE:IBM) , Cisco Systems (NASDAQ:CSCO) , and Intel (NASDAQ:INTC) .
Single sector representatives were positioned in the last three slots. The industrial firm, Boeing (NYSE:BA) , Consumer Defensive firm, WalMart (NYSE:WMT) , and Healthcare insurer, UnitedHealth Group (NYSE:UNH) , completed the top ten Dow leaders by safety margin for dividends.
Actionable Conclusions: (2) Six Dow Dogs Failed the Margin Test
Dow dogs, with negative margins included firms in six sectors. Basic Materials (1); Industrials (2); Energy (2); Financial Services (1).
Surprise bottom-dweller Goldman Sachs Group (NYSE:GS) is, according to their own financial reports, the most likely Dow dog to be constrained by cash flow to make dividend payments.
For the last several years Dow stocks have become increasingly popular with investors seeking safety. As a result, share prices have risen to overbought status. The high demand for these stocks has driven Dow aggregate single share prices to exceed the annual dividend derived from $1k invested.
This gap between high share price and low dividend per $1k invested shows an overbought condition. Meaning, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend was $28.99 per YCharts as of June 22.
Compared to the DOW, the SafeStox ten show a pattern where aggregate dividend value of $1k investments in each remained slightly above the aggregate single share price. So, in slight (40%) contrast to the Dow, Champion Dog top ten average price per dollar of annual dividend was $20.52 as of June 21.
Should Dow prices somehow move to a level 30-35% lower, they could again become attractive dividend buys! As it stands, the Dow has become an index of growth stocks as their dividends remain trapped by their high market prices.
Actionable Conclusions: (3) SafeStox Dog Analysts Anticipated Ten Top Issues by Yield Producing 21.07% Average Upside into June 2017 While (4) Four Low-End Estimates Showed 6.68% Average Downside.
The O'Higgins dividend/price metrics system works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates has expanded the stock universe to include popular growth equities, if desired.
To quantify top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metrics, analyst mean price target estimates provided another tool to dig out bargains.
Actionable Conclusions: Wall St. Wizards Estimated (5) 8.21% Average Upside & (6) 9.72% Average Net Gain from Top 30 Dividend SafeStox By June 2017
Top thirty dogs from the YCharts Dividend SafeStox List were graphed below as of June 21, 2016 compared to analyst mean price target estimates for the same date in 2017.
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 2017.
Historic prices and actual dividends paid from $30,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those thirty stocks divided by 3 created data points for 2016. Projections based on estimated increases in dividend amounts from $1000 invested in the thirty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points green for price and blue for dividend.
Analyst data reported by Yahoo finance projected a 6.8% lower dividend from $30K invested as $1k in each stock in this group while aggregate single share price was projected to increase 6.6% in the coming year.
Notice that the chart showed price exceeding dividend. So, analysts predicted an overbought SafeStox collection emerging by 2017. 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 charts. Three to nine analysts have shown the best track record for accurate estimates.
A beta (risk) ranking for each 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 Conclusion (7): Analysts Alleged Ten Dividend SafeStox Dogs Showing 13.59% to 43.97% Gains By June 2017
Six of the ten top dividend yielding SafeStox dogs were among the ten gainers for the coming year based on analyst 1 year target prices. So this month the dog strategy as graded by Wall St. wizards was 60% accurate.
Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance into 2017:
Lazard Ltd. (NYSE:LAZ) was projected to net $439.69 based on a median target price estimate from eight analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 18% less than the market as a whole.
Valero Energy (NYSE:VLO) was projected to net $359.05 based on dividends plus a median target price estimate from fourteen analysts less broker fees. The Beta number showed this estimate subject to volatility 14% more than the market as a whole.
DineEquity (NYSE:DIN) was projected to net $265.68 based on dividends plus median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 40% less than the market as a whole.
Moelis & Co was projected to net $220.85 based a median target price estimate from eight analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 428% more than the market as a whole.
Manulife Financial (MFC) was projected to net $202.25 based on dividends plus a median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 36% more than the market as a whole.
LyondellBasell Industries (NYSE:LYB) was projected to net $201.80 based on a median target price estimate from nineteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 2% less than the market as a whole.
Quad/Graphics was projected to net $194.56 based on dividends plus a median target price estimate from two analysts less broker fees. The Beta number showed this estimate subject to volatility 34% more than the market as a whole.
AbbVie (NYSE:ABBV) was projected to net $169.20 based on dividends plus a median target price estimate from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 47% more than the market as a whole.
NextEra Energy Partners (NEP) was projected to net $164.38 based on dividends plus a median target price estimate from fourteen analysts less broker fees. The Beta number showed this estimate subject to volatility 92% more than the market as a whole.
Western Digital (NYSE:WDC) was projected to net $135.89 based on dividends plus a median target price estimate from twenty-six analysts less broker fees. The Beta number showed this estimate encountering volatility 20% more than the market as a whole.
The average net gain in dividend and price was predicted to be 23.53% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 61% more than the market as a whole.
Actionable Conclusion (8): (Bear Alerts) Analysts Estimated Two SafeStox Dog To Show An Averaged Net Loss Of 9.47% By 2017
Probable losing trades revealed by Thomson/First Call in Yahoo Finance in 2017 were:
Canadian Imperial Bank was projected to lose $76.51 based on dividend and a median target price estimate from three analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 19% more than the market as a whole.
Helmerich & Payne (NYSE:HP) was projected to lose $112.88 based on dividend and a median target price estimate from twenty-nine analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 100% opposite the market as a whole.
The average net loss in price plus broker fees including annual dividends was predicted to be 9.47% on $2k invested as $1k in each of these two dogs. This loss estimate was subject to average volatility 10% less than the market as a whole.
Actionable Conclusion (9): Analysts Again Take The Predictive Paths Less Traveled
Year to date price performance of Helmerich & Payne , the SafeStox portfolio "loser" red-lined by analysts, showed a mighty upside when compared to the negative price history for analyst tagged upside leader, Lazard Ltd. (LAX).
Momentum has shunned another analyst forecast.
Dog Metrics Extracted Bargains
As noted above, ten SafeStox dividend dogs showing the biggest dividend yields as of June 21 represented four of nine Yahoo business sectors: three basic materials; two service; four financials; one utility. In the Morningstar scheme of eleven sectors, the top ten SafeStox covered six: two basic materials; one industrial; four financial services; one energy; one consumer cyclical; one utility. Listed as of market close, June 21, SafeStox dividend dogs ranged in yield thus:
Actionable Conclusions: Analysts Allege (10) 5 Lowest Price SafeStox Deliver 14.13% VS. (11) 17.31% Net Gains from All Ten As Of June 21, 2017
$5000 invested as $1k in each of the five Lowest priced stocks in the top ten SafeStox kennel by yield promised 18.36% LESS net gain than $5,000 invested as $500 in each of all ten. The sixth lowest priced SafeStox dog, Lazard Ltd., was projected to deliver the best net gain of 43.97%.
Lowest priced five SafeStox dogs as of June 21 were: Schnitzer Steel Industries; Quad/Graphics; Power Financial (OTCPK:POFNF); Moelis & Co.; NextEra Energy Partners, whose prices ranged from $16.77 to $28.94.
Higher priced five SafeStox dogs as of June 21 were: Lazard Ltd.; Valero Energy; Canadian Imperial Bank; DineEquity; Terra Nitrogen Co. (NYSE:TNH), whose prices ranged from $33.24 to $106.37.
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. It also works well for testing bargain Champion dogs, as you see.
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. Its 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.
See my instablog for specific instructions about how to best apply the dividend dog data featured in this article.--Fredrik Arnold
The net gain and loss estimates above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.
Seven of these SafeStox pups qualify as valuable catches! They are listed with the now 44 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to subscribe or get more information.
A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. For a free copy of both quarterly reports and analysis of the winning Arnold Q1 & Q2 picks, plus a surprise bonus bottom dog report, just send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any type to: firstname.lastname@example.org. Remember: E-mail, ticker, team!
Stocks listed above were suggested only as possible starting points for your index dog dividend stock purchase or sale research process. These were not recommendations.
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.
Graphs and charts were compiled by Rydlun & Co., LLC from data; finance.yahoo.com; analyst mean target prices by Thomson/First Call in Yahoo Finance.
Disclosure: I am/we are long INTC, CSCO, MFC, 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.