The Dogs Of The Dow September Update By Dividend Dogcatcher

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Includes: BA, CAT, CSCO, CVX, DWDP, GS, IBM, INTC, JPM, KO, MCD, MRK, PFE, PG, VZ, WMT, XOM
by: Fredrik Arnold

Summary

"The Dow® adds a stock if the company has an excellent reputation, demonstrates sustained growth, and is of interest to a large number of investors. Sector representation.is also a consideration.".

30 Dow stocks represent nine of eleven Sectors. Dow Tracks utilities as a separate index and omits real estate. Broker target-estimated net-gains ranged 9.1%-21.5% topped by Chevron as of 9/19/18.

Top Dow dog by yield was VZ. The top-yield ten, JPM, MRK, CSCO, PFE, KO, PG, CVX, XOM, IBM, & VZ averaged 3.42% yield.

Dow top ten firms by broker target price upsides, UTX, WMT, MSFT, CAT, BA, MCD, GS, DWDP, INTC, &  CVX averaged 13.16% broker-estimated price gains.

Analyst one-year targets determined that ten highest yield Dow stocks could produce 19.58% less gain from $5k invested in the lowest-priced five than from $5k in all ten. High-priced "big" dogs led the Dow again.

Actionable Conclusions (1-10): Brokers Predicted 9.1% To 21.5% Net Gains For Ten Dow Dogs By September, 2019

Three of ten top dividend-yielding Dow dogs were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices. (They are tinted gray in the chart above). So, this yield-based forecast for Dow dogs, as graded by Wall St. wizards, was 30% accurate.

Projections based on estimated dividend returns from $1000 invested in the ten highest yielding stocks and their aggregate one year analyst median target prices, as reported by YCharts, created the 2018-19 data points. Note: one year target prices by lone analysts were not applied. Ten probable profit-generating trades projected to August, 2019 were:

Chevron (CVX) was projected to net $214.97, based on a median target price estimate from twenty-two analysts, plus the estimated annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 7% more than the market as a whole.

Intel (INTC) was projected to net $191.86 based on dividends, plus a median target estimate from thirty-eight brokers, less broker fees. The Beta number showed this estimate subject to volatility 3% under the market as a whole.

DowDuPont (DWDP) was projected to net $154.07, based on a median target estimates from twenty-three analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 34% more than the market as a whole.

McDonald's (MCD) was projected to net $146.37, based on dividends, plus a mean target price estimate from thirty-one analysts, less broker fees. The Beta number showed this estimate subject to volatility 34% less than the market as a whole.

Goldman Sachs Group (GS) was projected to net $143.44, based on target price estimates from twenty-seven analysts, plus annual dividend, less broker fees. The Beta number showed this estimate subject to volatility 27% more than the market as a whole.

Boeing (BA) netted $115.20 based on a target price estimate from twenty-one analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 44% more than the market as a whole.

Caterpillar (CAT) was projected to net $103.33, based on dividends, plus a mean target price estimate from twenty-seven analysts, less broker fees. The Beta number showed this estimate subject to volatility 37% more than the market as a whole.

Coca-Cola Co. (KO) was projected to net $100.50, based on dividends, plus a median target price form twenty-six analysts, less broker fees. The Beta number showed this estimate subject to volatility 26% less than the market as a whole.

IBM (IBM) was projected to net $92.01, based on dividends, plus a mean target price estimate from twenty-three analysts, less broker fees. The Beta number showed this estimate subject to volatility 12% under the market as a whole.

Walmart Inc (WMT) was projected to net $91.02, based on a target price estimate from thirty-one analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 7% more than the market as a whole.

The average net gain in dividend and price was estimated at 13.53% on $10k invested as $1k in each of these ten Dow stocks. This gain estimate was subject to average volatility 6% over the market as a whole.

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." More precisely, these are, in fact, best called, "underdogs".

The September Dow 30 Index By Yield

Actionable Conclusion (11-20) 10 Top Dow Dividend Stocks By Yield Range 2.70% To 4.47% Per YCharts & Range 2.77% To 4.47% Per IndexArb

Top ten Dow dogs as of 9/20/18 by YCharts and IndexArb represented six and seven of eleven Morningstar sectors. Both put the top four the same order, however the bottom six were differentiated by order and one symbol substitution. Top yielding stock, Verizon Communications (VZ) [1] was the lone communication services sector representative in the top ten. Second place was occupied by technology in the form of IBM (IBM) [2].

Third and fourth places were taken by, energy firms Exxon Mobil (XOM) [3], and Chevron, (CVX) [4]

Fifth and sixth places went to consumer defensive representatives, Procter & Gamble (PG) [5][6], and, Coca-Cola (KO) [6][5].

Seventh place was occupied by the first of two healthcare representatives in the top ten, Pfizer (PFE) [7]. The other healthcare firm placed ninth or tenth, per YCharts or Index.ARB, Merck & Co (MRK) [9][10].

Ninth place for Index.ARB went to a consumer cyclical representative, McConald's (MCD)[9]. The open tenth slot for Ycharts went to JPMorgan Chase & Co. JPM [10], to complete the YChart and IndexArb September top ten list of Dow dogs by yield.

Dow Dog Dividend Vs. Price Results

Graphs above show the relative strengths of the top ten Dow dogs by yield as of market close 9/20/2018. The two sets of charts show the variation of dividends calculated by YCharts.com estimates and those from the arbitrage firm IndexArb.com.

Top ten Dow dogs show an overbought condition (in which aggregate single share price of the ten exceeds projected annual dividend from $10k invested as $1k each in those ten). A dividend dogcatcher priority is to source stocks whose dividends from $1K invested exceed their single share price. On the Dow 30 Index, none any longer meet that goal.

Actionable Conclusion (21): Dow Dogs Stay Overbought

The aggregate single share price for the top ten Dow dogs was 71% per both YCharts and IndexArb, while the dividend derived from $10k invested as $1k in each of the ten was 29% by those two estimates.

This gap between high share price and low dividend per $1k (or oversold condition) means, no matter which chart you read, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend for September 20, 2018 was $28.67 per YCharts or $28.10 in the IndexArb reckoning.

Actionable Conclusions: (22-31) Dow Has 8.92% To 19.75% Top Ten Upsides To September, 2019; (32) Four Downsides Were Noted

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.

Analysts Forecast A 19.58% Disadvantage For 5 Highest Yield, Lowest Priced Dow Index Stocks To September 2019

Ten top Dow dogs were culled by yield for their monthly update. Yield (dividend / price) results verified by YCharts did the ranking.

As noted above, top ten Dow dogs selected 9/20/18 showing the highest dividend yields represented five of eleven sectors in Y-Charts and six of eleven by IndexArb reckonings of the index.

Actionable Conclusions: Analysts Expected 5 Lowest-Priced of the Top Ten Highest-Yield Dow Dogs (33) To Deliver 5.59% Vs. (34) 6.95% Net Gains by All Ten Come September, 2019

$5000 invested as $1k in each of the five lowest-priced stocks in the top ten Dow Dividend kennel by yield were predicted by analyst 1-year targets to deliver 19.58% LESS than from $5,000 invested in all ten. The ninth lowest priced Dow top yield dog, Chevron (CVX), was projected to deliver the best net gain of 21.5%.

The five lowest-priced Dow top yield dogs for September 20 were: Pfizer (PFE); Coca-Cola (KO); Cisco Systems (CSCO); Verizon Communications (VZ); Merck & Co. (MRK), with prices ranging from $43.75 to $70.78.

Five higher-priced Dow dogs for September 20 were: Exxon Mobil (XOM); Procter & Gamble (PG); JPMorgan Chase & Co (JPM); Chevron (CVX); International Business Machines (IBM), whose prices ranged from $84.82 to $151.15.

The distinction between five low-priced dividend dogs and the general field of ten reflected Michael B. O'Higgins' "basic method" for beating the Dow. The scale of projected gains based on analyst targets added 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. Caution is advised, since analysts are historically only 20% to 80% accurate on the direction of change and just 0% to 20% accurate on the degree of change.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article, this glossary instablog to interpret my abbreviated headings, and this instablog to aid your safe investing. --Fredrik Arnold

The net gain/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.

Stocks listed above were suggested only as possible reference points for your Dow dividend dog 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 www.indexarb.com; YCharts.com; finance.yahoo.com; analyst mean target price by Thomson/First Call in YahooFinance. Dog photo: marketing intelligencecenter.com

Disclosure: I am/we are long CSCO, INTC, PFE.

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.