Dogs Of The Dow Delight After September

by: Fredrik Arnold

The best of the best dividend stocks are sought by some investors using a once per year trading system triggered by yield, called the "Dogs of the Index." This strategy gives investors the tactical advantage of obtaining all the wisdom and knowledge of well-paid wizards of investment and publishing for free, merely by choosing an existing collection of equities built by those experts.

This Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), revealed how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) could be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index. Charts below display a snapshot of the Dow Index as of October 3, 2012.

Two key metrics determined the yields that ranked the Dow dog stocks: (1) Estimated annual dividend; (2) Stock price. Dividing the annual dividend by the price of the stock declared the percentage yield by which each dog stock was ranked. Thus dividend dog investors utilized this ranking system to select portfolios of five or ten stocks in any one index, sector, or survey to trade. They awaited the results from their investments in the lowest priced, highest yielding stocks and prayed that the price of every stock they now owned climbed higher (having locked in a high yield percentage at purchase).

Investment empowerment from the Dow 30 Industrials

Listed below are the thirty Dow Index stocks by yield as of 10/3/12 per data, which stated: "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."

CME Group, publisher of this index, stated, "The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 blue-chip U.S. companies representing nine economic sectors including financial service, technology, retail, entertainment and consumer goods. The leadership position of the component stocks in the DJIA tends to result in an extremely high correlation of the DJIA to broader U.S. indexes, such as the S&P 500 Index providing additional opportunities."

Three technology firms showed the highest dividend yields on the Dow after September: (1) AT&T (NYSE:T); (2) Verizon (NYSE:VZ); (3) Intel (NASDAQ:INTC). Hewlett-Packard (NYSE:HPQ) might have made it a four dog technology hitch at the top had its price slid further. However, Merck (NYSE:MRK), the top dog of three in healthcare, intervened to push HPQ into the fifth slot. Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) were the other two healthcare dogs. Completing the post-September top ten Dow dogs were: General Electric (NYSE:GE), representing industrial goods; E. I. du Pont de Nemours (NYSE:DD), representing basic materials; McDonald's (NYSE:MCD), representing services.

The full list of thirty Dow stocks included seven technology companies, one consumer goods, (Kraft (KFT) gave way September 14 to United Health (NYSE:UNH)) to create four healthcare firms added to four financial, five services, four basic materials, three industrial goods, no utilities, and two conglomerates representing market sectors.

Dividend vs. Price Results for Dow 30 Dogs

Relative yield strengths of the top ten Dow 30 Index stocks were graphed as show below as of October 3, 2012. Projected annual dividends from $1,000 invested in the ten highest yielding stocks each month and the total single share prices of those ten stocks created the data points for each of the past periods shown in green for price and blue for dividends.

Conclusion: Overbought Dow Resumes Bullish Verve

Dow 30 Index dogs reflected bull market symptoms from May to June as projected dividend totals for $1,000 invested in the top ten dropped 6.57%, while their aggregate total single share prices popped 7.9%. The summer doldrums created a bearish price sag and dividend uptick to converge at the $401 data point. The post-September shake-up of the Dow list, adding HPQ and MCD to the top ten while JPM and PG fell out, accounts for the price pop. Using dividend data held the aggregate sag more in check than Yahoo's calculations and also jiggered the standings.

Since January 2012, this ever changing list of Dow dogs has shown an aggregate single share price increase for the top ten of 23.3% accompanied by a 3.5% sag in projected annual dividend totals from $1000 invested in each of the top ten.

Conclusion Two: Analysts Forecast 2013 Net Gains up to 12.63% for Dow Dogs

Top ten dogs for the Dow Index component list were graphed below to show relative strengths by dividend and price as of October 3, 2012 and those projected to October 3, 2013.

Historic prices and actual dividends paid from $1,000 invested in the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1,000 invested in the ten highest yielding stocks and aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2013 data points. Data is graphed in green for price and blue for dividends.

For the coming year, Yahoo Finance projected a 7.5% lower dividend amount from $1,000 invested in each stock within this group while aggregate single share price for the ten was projected by analysts to increase by 6.9%.

Seven probable profit generating Dow dog trades projected one year hence by analysts as reported by Yahoo Finance were: Intel netting $177.34 based on mean target pricing set by 39 analysts; Merck netting $41.82 based on mean target pricing set by 15 analysts; Hewlett Packard netting $560.15 based on mean target pricing set by 23 analysts; Pfizer netting $73.21 based on mean target pricing set by 16 analysts; Johnson & Johnson netting $86.09 based on mean target pricing set by 15 analysts; General Electric netting $86.07 based on mean target pricing set by 13 analysts; McDonald's netting $112.60 based on mean target pricing set by 24 analysts; Dupont netting $177.45 as of next July based on a mean target price set by 15 analysts.

The resulting top ten Dow dog net gain to 2013 from dividends and swept price gains was 12.63% from $10,000 invested according to analyst estimates.

A nearly 83% more rewarding outcome than that detailed in the "Dogs of the Index" strategy above is described in a separate article titled: "23% Net Gains from Ten Dow Dogs?"

You are invited to tune in.

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 long T, VZ, INTC, JNJ, CVX. 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.

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