The Dividend Dogs Rule
The "dog" moniker was earned by stocks 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." More specifically, these are, in fact, best called, "underdogs."
FTSE Russell states:
"Using a rules-based and transparent process, Russell forms its indexes by listing all companies in descending order by market capitalization adjusted for float, which is the actual number of shares available for trading. In the United States, the top 3,000 stocks (those of the 3,000 largest companies) make up the broad-market Russell 3000 Index. The top 1,000 of those companies make up the large-cap Russell 1000 Index, and the bottom 2,000 (the smallest companies) make up the small-cap Russell 2000 Index."
Which Sectors Are "Safe" In The Russell 1000 Index?
Five of eleven Morningstar sectors were represented by the 23 R1K firms whose dividends were bolstered by adequate cash as of February 22. The sector representation broke-out, thus: Real Estate (12); Communication Services (2); Financial Services (1); Consumer Cyclical (7); Industrials (1); Healthcare (0); Technology (0); Consumer Defensive (0); Utilities (0); Energy (0); Basic Materials (0).
Top ten R3K "safe" dogs showing the widest safety margin of cash to cover dividends by this screen as of February 22 represented the first four sectors on the list above.
Russell 1000 Index Firms With "Safe" Dividends
Periodic Safety Inspection
You see grouped below the list of 23 that passed the R1K index dog "safety" check with sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the bold face "Safety Margin" column.
Corporate financial solvency however is easily adjusted by a malevolent, spendthrift, or tightwad board of directors promoting company policies canceling or varying the payout of dividends to shareholders. On the list above, for example, AGNC Investment (AGNC) on July 27, 2016 announced a reduction of its $.20 monthly shareholder payout to $.18 as of September. Also, Annaly Capital Management, like many firms, utilizes a variable quarterly payment to keep dividends aligned with cash flow. In other action, Ford (F) famously cut its dividend from $0.10 per quarter to $0.05 in July 2006, then in September 2006 cancelled all dividends for over five years until reinstating them at the $0.05 quarterly amount in January, 2012. You see, even if the money is available for dividends now, company directors may choose to apply it elsewhere.
Three additional columns of financial data, listed after the Safety Margin figures above, reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. This data is provided to reach beyond yield to select reliable payout stocks. Positive results in all five columns after the dividend ratio is remarkable as a solid financial signal.
Dividend vs. Price Compared to Dow
Ten top "safe" R1K Index dividend dog stocks by yield were graphed below as of 2/22/17 and compared to those of the Dow. Annual dividend amounts from $1000 invested in each of the ten highest yielding stocks and their aggregate single share price created the data points shown in green for price and blue for dividends.
Actionable Conclusions: (1) Top Russell 1000 Index Dog Dividend Exceeds Price By 82% While (2) Dow Dogs Price Exceeds Dividend By 70%
Ten top "Safe" R1K Index dogs aggregate single share price for top ten yielding dogs was 18% of the dividend derived from $10k invested as $1k in each of the top ten stocks.
Meanwhile, Dow dogs aggregate single share price for top ten yielding dogs was 70% of the dividend derived from $10k invested as $1k in each of the top ten stocks.
As a result, the Dow dogs overbought condition (where aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k in each) shows as not the pack to back for new investors
The Overbought Dow
The Dow Dogs a becoming more overbought and overpriced. Meaning, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend was $28.30 February 22.
Opposite the Dow, "Safe" R1K dividend dog top ten average price per dollar of annual dividend was $11.61 as of 2/22/17. That's 41% less than the price for a dollar of Dow annual dividends. Matched against top ten Dow Dogs, the "safe" R3K ten produced 241% more dividend returns at 23% of the top ten Dow Dog aggregate price.
To quantify top dog rankings, analyst mean price target estimates provided a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates provided another tool to dig out bargains.
Actionable Conclusion (3): Wall St. Wizards Forecast A 6% 1 yr. Average Upside and 11.3% Net Gain From the Top 23 "Safe" Russell 1000 Index Stocks
Top dogs on the "Safe' R1K stock list were graphed above to compare relative strengths by dividend and price as of February 22, 2017 with those projected by analyst mean price target estimates to the same date in 2018.
Historic prices and actual dividends paid from $10,000 invested as $1K in each of the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points applied to 2017. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest yielding stocks and aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2018 data points in blue for dividend and green for price. Note: one year target prices from one analyst were usually not applied (n/a).
Analysts projected an 4.5% lower dividend from $10K invested as $1k in the top ten February R1K "Safe" dogs while aggregate single share price was projected to increase by 4% 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 above chart. Three to nine analysts were considered optimal for a valid projection estimate. Estimates provided by one analyst were usually not applied (n/a).
A beta (risk) ranking for each stock was provided in the far right column. 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 opposed to market direction.
Actionable Conclusion (4): Analysts Predicted Top Ten Russel 1000 Index "Safe" Dog Stocks to Net 8% to 72.5% Gains By February, 2018
Seven of the ten top "safe" dividend R3K dogs (tinted gray in the chart above) were verified as being among the Top ten gainers for the coming year based on analyst 1 year target prices. Thus the dog strategy for this R1K group as graded by analyst estimates for February proved just 20% accurate.
Ten probable profit generating trades were illustrated by YCharts analytics for 2018:
Colony NorthStar (CLNS) netted $724.92 per estimates from three analysts, plus dividends less broker fees. The Beta number showed this estimate subject to volatility 33% less than the market as a whole.
Pitney Bowes (PBI) netted $321.29 based on estimates from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 36% less than the market as a whole.
Mattel (MAT) netted $222.53 based on a median target price from sixteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 11% less than the market as a whole.
CenturyLink (CTL) netted $194.66 based on dividends plus the median of annual price estimates from sixteen analyst less broker fees. The Beta number showed this estimate subject to volatility 83% less than the market as a whole.
VEREIT (VER) netted $142.92 based on dividends plus median target price estimate from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 36% less than the market as a whole.
Starwood Property Trust (STWD) netted $104.62 based on mean target price estimates from nine analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 51% less than the market as a whole.
Ford Motor (F) netted $100.76 based on target price estimates from twenty-one analysts, plus dividends less broker fees. The Beta number showed this estimate subject to volatility 3% more than the market as a whole
Macy's (M) netted $108.24, based on dividends plus target price estimates from twenty-four analysts plus dividends with broker fees subtracted. The Beta number showed this estimate subject to volatility 21% less than the market as a whole.
AGNC Investment (AGNC) netted $90.77, based on dividend, plus a median target price estimate from thhirteen analysts, less broker fees. The Beta number showed this estimate subject to volatility 86% less than the market as a whole.
CoreCivic (CXW) netted $80.87 based on median target estimates from four analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 1% less than the market as a whole.
Average net gain in dividend and price was 20.92% on $1k invested in each of these ten "Safe" NASDAQ dogs. This gain estimate was subject to average volatility 22% less than the market as a whole.
Actionable Conclusion (5): (Bear Alert) Analysts Expected One "Safe" Russell 1000 Index Dog To Lose 4.96% By February, 2018
A probable losing trade revealed by Thomson/First Call in Yahoo Finance for 2018 was:
Artisan Partners Asset Management (APAM) projected a loss of $49.61 based on dividend and a median target price estimate from six analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 77% more than the market as a whole.
Dog Metrics Found Bargains From Lowest Priced "Safe" Dividend Russell 1000 Index Stocks
Ten "Safe" R3K firms with the biggest yields February 22 per YCharts data ranked themselves by yield as follows:
Actionable Conclusions: (6) Analysts Expected 5 Lowest Priced, of Ten "Safe" Dividend High Yield Russell 1000 Index Dogs, To Deliver 19.82% VS. (7) 15.54% Net Gains from All Ten by February, 2018
$5000 invested as $1k in each of the five lowest priced stocks in the "safe" ten R3K pack by yield were determined by analyst 1 year targets to deliver 27.55% more net gain than $5,000 invested as $.5k in all ten. The fourth lowest priced safe dividend R1K dog, Colony NorthStar (CLNS) showed the best net gain of 72.49% per analyst targets.
Lowest priced five "safe" R1K dogs as of February 22 were: VEREIT (VER); Annaly Capital Management (NLY); Ford Motor (F); Colony NorthStar; Chimera Investment, with prices ranging from $8.90 to $19.17.
Higher priced five "Safe" Dividend R1K Index dogs as of February 22 were: AGNC Investment (AGNC); Starwood Property Trust (STWD); CenturyLink (CTL); Mattel (MAT); Artisan Partners Asset Management (APAM) with prices ranging from $19.50 to $30.40.
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. Its also the work analysts got paid big bucks to do.
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 net gain estimates mentioned 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.
Stocks listed above were suggested only as possible starting points for your safe dividend S&P500 dog stock research process. These were not recommendations.
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Root for the Underdog.
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 www.ycharts. com; www.finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance. Dog photo from: akc.org.
Disclosure: I am/we are long VZ, PFE, GE, CSCO, INTC,.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.