The Dividend Dogs Rule
Stocks earned the "dog" moniker by exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs."
Safety Tested Low Price High Dividend Dogs
Finding hundreds of stocks priced between $3 and $15 per share, yielding more than 8%, and market capitalization over $100 million was easy using YCharts stock screener. The ultimate test for the 112 stocks found in the initial sort, was comparing dividend yield to free cash flow yield to gauge the "safest."
The breakdown by market cap showed XN Microcap, Small, Mid, & Large cap HiDivLoPriceSafeDogs valued at $100M(illion) to $2B(illion): Four XN Microcap firms worth $100M to $200M; Twenty four Small caps valued at $200M to $2B; Three Mid cap firms were worth $2B to $10B; One Large cap was valued above $10B.
Of course there's no guarantee that any dividend ruled by a committee of directors is safe. However, following the traditional logic that if the company has the cash, they'll cough up the promised dividend, the free cash flow yield for 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.
Results from that data charted below showed six of eleven Morningstar business sectors represented by thirty-two top yield, low price, safe stocks: (1) eleven financial services; (2) one basic materials; (3) thirteen real estate; (4) three energy; (5) three industrials; (6) one technology.
Top ten HiDivLoPriceSafeDogs by yield covered four: six financial services; one basic materials; two real estate; one energy. Those ten stocks posted yields averaging 15.39%.
Actionable conclusions by yield, target price upsides, and net gains were drawn below as top HiDivLoPriceSafeDogs dog selections for July/August were examined, step by step.
Actionable Conclusion (1) Ten HiDivLoPriceSafeDogs Showed 5.23% to 12.66% 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.
HiDivLoPriceSafeDogs Showed 32 With Cash Cushions Ranging 1.54% To 50.55%
Screening YCharts for stocks priced $3 to $15, yielding 8% or better with market caps over $100M found these 32 with free cash flow yield exceeding dividend yield.
Actionable Conclusion (2) Ten HiDivLoPriceSafeDogs Showed 18.17% to 50.55% Safety Margins
Financial services placed second, third, fifth sixth, ninth and tenth: TICC Capital (TICC) ; Manning & Napier (NYSE:MN) ; KCAP Financial (NASDAQ:KCAP) ; Gladstone Capital (NASDAQ:GLAD) ; Fifth Street Finance (FSC) ; Apollo Investment (NASDAQ:AINV) .
Seventh place went to the energy representative, Transocean Partners (NYSE:RIGP) , and eighth place was secured by the industrials sector representative, Costamare (NYSE:CMRE) , which completed the top ten HiDivLoPriceSafeDogs by margin for July.
Actionable Conclusions: (3) HiDivLoPriceSafeDog Analysts Predicted Ten Top Issues by Yield Producing 18.05% Average Upside into July/August 2017 While (4) Five Low-End Estimates Showed 10.06% 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) 5% Average Upside & (6) 16.6% Average Net Gain from Top 30 HiDivLoPriceSafeDog By July/August 2017
Top thirty dogs from the YCharts HiDivLoPriceSafeDogs List was graphed below as of July 29, 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 3% lower dividend from $30K invested as $1k in each stock in this group while aggregate single share price was projected to increase almost 6% in the coming year.
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 Cast Ten Dividend HiDivLoPriceSafeDogs To Show 12.75% to 39.41% Gains By July 2017
Three of the ten top dividend yielding HiDivLoPriceSafeDogs 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 30% accurate.
Ten probable profit generating trades were revealed by Thomson/First Call in Yahoo Finance into 2017:
Comtech Telecommunications (NASDAQ:CMTL) was projected to net $563.78 based on a median target price estimate from four analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 114% more than the market as a whole.
Transocean Partners was projected to net $394.84 based on dividends plus median target price estimate from three analysts less broker fees. A Beta number was not available for RIGP.
KCAP Financial was projected to net $303.88 based on dividends plus a median target price estimate from two analysts less broker fees. The Beta number showed this estimate subject to volatility 77% more than the market as a whole.
Dynagas LNG Partners (NYSE:DLNG) was projected to net $231.95 based on dividends plus a median target price estimate from six analysts less broker fees. A Beta number was not available for DLNG.
Fifth Street Finance was projected to net $224.84 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 95% less than the market as a whole.
Costamare was projected to net $222.08 based on a median target price estimate from five analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 98% more than the market as a whole.
Anworth Mortgage Asset (NYSE:ANH) was projected to net $219.84 based on dividends plus a median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 91% less than the market as a whole.
New Residential Investment (NYSE:NRZ) was projected to net $211.89 based on dividends plus a median target price estimate from nine analysts less broker fees. The Beta number showed this estimate subject to volatility 3% less than the market as a whole.
Arlington Asset Investment (NYSE:AI) was projected to net $200.39 based on dividends plus a median target price estimate from seven analysts less broker fees. The Beta number showed this estimate subject to volatility equal to the market as a whole.
RAIT Financial Trust (NYSE:RAS) was projected to net $197.67 based on dividends plus a median target price estimate from six analysts less broker fees. The Beta number showed this estimate encountering volatility 53% more than the market as a whole.
The average net gain in dividend and price was predicted to be 27.71% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 36% more than the market as a whole.
Actionable Conclusion (8): (Bear Alert) Analysts Estimated One HiDivLoPriceSafeDog To Show A Net Loss Of 6.48% By 2017
Probable losing trades revealed by Thomson/First Call in Yahoo Finance in 2017 were:
Prospect Capital Corporation (NASDAQ:PSEC) was projected to lose $64.78 based on dividend and a median target price estimate from seven analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 62% less than the market as a whole.
Actionable Conclusion (9): Analysts Continue To Explore Predictive Paths Less Traveled
One year price performance of Prospect Capital Corporation, the HiDivLoPriceSafeDogs portfolio "loser" red-lined by analysts, showed a better upside compared to the negative price history for analyst tagged upside leader, Comtech Telecommunications.
Momentum has abandoned another analyst forecast.
Dog Metrics Expected To Extract Bargains But Didn't
As noted above, ten HiDivLoPriceSafeDogs showing the biggest dividend yields as of July 29 represented four of eleven Morningstar business sectors by yield: six financial services; one basic materials; two real estate; one energy. Listed as of market close, July 29, HiDivLoPriceSafeDogs ranged in yield thus:
Actionable Conclusions: Analysts Asserted (10) 5 Lowest Price HiDivLoPriceSafeDogs Would Deliver 16.11% VS. (11) 19.09% Net Gains from All Ten As Of July 29, 2017
$5000 invested as $1k in each of the five Lowest priced stocks in the top ten HiDivLoPriceSafeDogs kennel by yield promised 15.62% LESS net gain than $5,000 invested as $500 in each of all ten. The seventh lowest priced HiDivLoPriceSafeDog, Transocean Partners , was projected to deliver the best net gain of 39.48%.
Lowest priced five HiDivLoPriceSafeDogs as of July 29 were: KCAP Financial ; Fifth Street Finance ; TICC Capital ; Apollo Investment ; New York Mortgage Trust (NASDAQ:NYMT), whose prices ranged from $4.23 to $6.54.
Higher priced five HiDivLoPriceSafeDogs dogs as of July 29 were: Medley Capital (NYSE:MCC); Transocean Partners ; New Residential Investment ; Arlington Asset Investment ; SunCoke Energy Partners (NYSE:SXCP), whose prices ranged from $7.29 to $14.34.
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 has yet to work well for testing bargain HiDivLoPriceSafeDogs, 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.
One of these HiDivLoPriceSafeDogs qualified as a valuable catch! It is listed with the now 49 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 Q1, and Q2 quarterly reports and analysis of the soon to be named winning Arnold Q3 August pick, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: email@example.com. 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 derived from ycharts.com; indexarb.com; dripinvesting.org/Tools/Tools.asp; finance.yahoo.com; analyst mean target prices by Thomson/First Call in Yahoo Finance. Photo: hausofpawsblog.com
Disclosure: I am/we are long FSC.
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.