This article reports results for the 3x9 Sectors Index as of September 28. It also shows results for selected top-yielding stocks from each of nine business sectors along with the best yielding runner-up from any sector as the tenth to perfectly diversify a top-10 sector index portfolio, named 1x9+1 Sectors Index.
These two sector indices were analyzed using a once per year trading system triggered by yield, called the "Dogs of the Index" to determine the best of the best dividend stocks.
Dogs of the Index Metrics
Two key numbers determined the yields to rank the stocks in each index: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declared the percentage yield by which each dog stock was ranked. Investors selected portfolios of five or 10 stocks in any one index or sector by yield to trade. They awaited the results from their investments in the lowest priced, highest yielding stocks they selected and prayed that the price of every stock they now owned climbed higher (having locked in a high-yield percentage at purchase).
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 seed money into higher-yielding stocks in the same index.
Investment Wisdom from the 3x9 and 1x9+1 Sectors
Listed below are the top 27 3x9 Sector stocks by yield as of 9/28/12 per Yahoo Finance data. This data was controversial since it reported estimated annual dividends that may or may not be paid depending on decisions by individual corporate governing boards.
Dog dividend methodology was applied in new forward tests for "Septober" using Dogs of the Index metrics for each of nine major market sectors: basic materials, consumer goods, conglomerates, financial, healthcare, industrial goods, services, technology and utilities. The 3x9 and 1x9+1 indices were 89% derived from data reported the "Septober" Dividend Dog Report.
The rankings of 1, 2 or 3 for the nine sectors indicate the relative positions of the stocks in each sector as of September 28.
For "Septober," the top 10 dividend paying stocks in this index represent four sectors: three from basic materials, Whiting USA Trust (NYSE:WHX), Oxford Resource Partners (OXF) and Whiting USA Trust II (WHZ); two from services, RadioShack Corporation (NYSE:RSH) and Box Ships (NYSE:TEU); three from financial, Armour Residential REIT (NYSE:ARR), Apollo Residential Mortgage (NYSE:AMTG) and New York Mortgage Trust (NASDAQ:NYMT); two from technology, City Telecom (H.K.) (CTEL) and Portugal Telecom SGPS (NYSE:PT).
Nine top dogs and top runner-up on the above chart form the "Septober" 1x9+1 list: Whiting USA Trust in basic materials; RadioShack for service; Oxford Resource Partners the basic materials runner-up; Armour Residential REIT in financial; City Telecom (H.K.), technology; Just Energy Group (NYSE:JE), utilities; Pitney Bowes (NYSE:PBI), consumer goods; PDL BioPharma (NASDAQ:PDLI), healthcare; Veolia Environnement (VE), industrial goods; Dow Chemical (NYSE:DOW), conglomerates.
Dividend vs. Price Results for 3x9 and 1x9+1 Sector index Dogs
Below are graphs reporting relative strengths of the top-10 3x9 Sector and 1x9+1 Sector index stocks by yield as of September 28, 2012. Projected annual dividend history from $1000 invested in the 10 highest-yielding stocks each month and the total single share price of those 10 stocks created the data points for each of the past seven periods shown in green for price and blue for dividends.
Conclusion: Sector Dogs Got Bearish Since May
Since January the 3x9 sector dividend sank 12% as stock price also decreased 46.5 % under a nullifying trend. Dividends and prices both fell as less expensive stocks with lower dividends ascended to the top.
From May to October however a classic bear market pattern emerged as aggregate top-10 stock prices sank 45% while projected dividends from $1k invested in each of the 10 3x9 Sector jumped up 21%. Projected gains from dividends from $1000 invested in each of the 10 highest-yielding stocks for the coming year in the 3x9 sector were 18%
Since January the 1x9+1 sector dividends sank 18.7% as stock prices also decreased 47.6 % under a nullifying trend. Dividends and prices both fell as less expensive stocks with lower dividends ascended to the top.
From May to October however a classic bear market pattern emerged as aggregate top-10 stock prices sank 41% while projected dividends from $1k invested in each of the 10 1x9+1 Sector stocks jumped up 21%. Projected gains from dividends from $1000 invested in each of the 10 highest-yielding stocks for the coming year in the 1x9+1 Sector were 14%
Conclusion Two: Analysts Forecast Annual Net Gains From 29% to 65%
Top 10 stocks on the 1x9+1 sector top-10 dog list were graphed below to show relative strengths by dividend and price as of July 10, 2012, and those projected to July 10, 2013.
Historic prices and actual dividends paid from $1000 invested in the 10 highest-yielding stocks and the aggregate single share prices of those 10 stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1000 invested in the 10 highest-yielding stocks and aggregate one-year analyst mean target prices as reported by Yahoo Finance created the 2013 data points, green for price and blue for dividends.
For the coming year Yahoo Finance projected a 20% lower dividend from $1k invested in each stock within this group while aggregate single share price for the 10 was projected by analysts to increase by 31%.
Probable profit generating trades one year from now revealed by Yahoo were Whiting USA Trust netting $2,093.02 based on target price set by 1 analyst, Armour Residential REIT netting $147.10 based on mean target price set by 7 analysts, City Telecom (H.K.) netting $3,204.84 based on target price set by 1 analyst, Pitney Bowes netting $210.10 based on mean target price set by 4 analysts, and Dow Chemical netting $161.35 based on mean target price set by 13 analysts. The resulting net gain from dividends and swept price gains was calculated at nearly 65% from $10k invested according to analyst estimates for 2013.
Note that the two trades projecting the highest net gains above were both based on single analyst estimates. The charts below were generated after cutting each of those two trades down by $10 per share.
For the coming year our modifications projected a 5% lower dividend from $1k invested in each stock within this group while aggregate single share price for the 10 was projected to increase by 11%.
Modifications put the Whiting USA Trust net gain at $662.40 based on a target price from 1 analyst reduced by $10 per share. City Telecom (H.K.) was modified to net $1,063.51 based on target price from its one analyst reduced by $10 per share.
The resulting net gain from dividends and swept price gains from the top 10 dogs was calculated at just over 29% from $10k invested according to these modified analyst estimates for 2013.
The next article in this series will report October dog metrics applied to seven additional indices. That article will show comparative results by yield, price, and net gains for: 3x9 Sector; 1x9+1 Sector; Russell; NYSE International 100; S&P 500; S&P 500 Aristocrats; NASDAQ 100; Dow 30 Industrials; JPMorgan New Sovereigns. Future semi-annual updates will describe how well or whether projected gains for 2013 hold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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.