Since 1991, when Michael B. O'Higgins wrote his book "Beating The Dow" (HarperCollins), investors have utilized his dividend dog ranking system to select portfolios of five or ten stocks in the Dow Index to trade as of the last day in December. Thereafter the dog investors awaited annual 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).
Since the traditional January first Dow dividend dog trading date has passed, the following information is provided for you to evaluate and determine if a dance with dogs of the Dow is for you in February 2014.
Dogs of the Dow Index Metrics
Prior to the publication of O'Higgins book, Dow dogs were known by some market watchers as "fallen angels."
Two key numbers determined the yields that ranked stocks in the Dow 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.
Investor Empowerment from the Dow Dogs
McGraw Hill Financial, publisher of this index, states: "The Dow®, is a price-weighted measure of 30 U.S. blue-chip companies. The Dow® covers all industries with the exception of transportation and utilities, which are covered by the Dow Jones Transportation Average™ and Dow Jones Utility Average™.
While stock selection is not governed by quantitative rules, a stock typically is added to The Dow® only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the indices is also a consideration in the selection process."
3 Dogs Of Dow Beg 10% to 17.5% January 2015 Upsides
Dow 30 Results from Yahoo Finance tallied as of market closing prices January 28, 2014 compared with analyst mean target price results one year hence showed ten stocks flashing near 10% to 17.5% price upsides.
AT&T Inc. (T), the Dallas headquartered telecom technology firm, displayed 9.67% upside to show the lowest upside of those ten. JPMorgan Chase & Co. (JPM) exhibited a 17.46% price upside to lead the ten.
The charts above used one year mean target price set by brokerage analysts matched against January 28 closing price to compare ten sector stocks showing the highest upside price potential into 2015 out of 20 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts were considered optimal for a valid mean target price estimate.
This article reports the Dow 30 Index as of the above date by projecting gain results one year hence. Seeking Alpha reader requests prompted this series of index-specific articles reporting dividend yield plus price upside results for these indices: Dow 30; S&P 500; Russell 2000 & 1000; S&P Aristocrats; NASDAQ 100; Champions; Challengers; Global.
Investor Glossary summarized dividend dog methodology thus: "...[I]nvented to find the 10 stocks of the 30-stock Dow Jones Industrial Average with the highest yield (dividend / price) and invest equally in each, [t]he Dow dividend theory also requires that you repeat this process once a year."
Below, the Arnold Dow 30 Index top dog selections for January were disclosed step by step.
Dog Metrics Rated Dow Stocks by Yield
The January 28 Dow dogs included six of nine business sectors in the top ten by yield. Two of four technology firms showed the biggest dividend yields according to indexArb.com: AT&T and Verizon (VZ). The other two techs, Cisco Systems (CSCO), and Intel Corp (INTC) placed fourth and fifth. The lone basic materials representative, Chevron Corp. (CVX), was third. The lone industrial goods firm, General Electric (GE) was sixth. The only services firm, McDonald's (MCD), placed seventh. Two healthcare firms ranked themselves in the eighth and ninth slots: Pfizer (PFE), and Merck (MRK). Finally, the lone consumer goods firm, Procter & Gamble (PG) placed tenth and rounded out the top ten Dow list.
Dividend vs. Price Results for Dow Top 10 Stocks
Relative strength for the top ten Dow industrial index stocks by yield was graphed below. Ten periods of historic projected annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks and the total single share price of those ten stocks created the data points for each period shown in blue for dividend and green for price.
Actionable Conclusion (1): Dow Dogs Dithered Up, Overbought Bliss Grew
Optimism returned to the Dow dogs as projected annual dividend from $10k invested as $1K in each of the top ten Dow dogs increased 1.3% since December. Aggregate single share price also grew over 7.4% to confuse the signal. The Dow dogs overbought condition, in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten, grew again. The overhang was $125 or 33% in August, expanded to $161 or 43% for September, shrank down to $111 or 30% for October, expanded again to $140 or 38% in November, closed a bit to $111 or 29% for December, then expanded again to $145 or 38% for January. Most of this recent optimism on the Dow was triggered by Procter & Gamble replacing Microsoft (MSFT) at the tail of the top ten Dow dogs.
To quantify the top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential and was added to the simple high yield "dog" metric used to sniff out bargains.
Actionable Conclusion (2): Wall St. Wizards Forecast 8.9% Net Gain from Top 20 Dow Dogs By 2015
Top twenty dogs from the Dow 30 Industrials were graphed below to show relative strengths by dividend and price as of January 28, 2014 and those projected by analyst mean price target estimates to the same date in 2015.
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 2014.
Historic prices and actual dividends paid from $20,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 2 created data points for 2014. Projections based on estimated increases in dividend amounts from $1000 invested in the twenty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 2 created the 2015 data points green for price and blue for dividend.
(click to enlarge)
Yahoo projected a nearly 9% lower dividend from $10K invested as $1k in each dog of this group while aggregate single share price was projected to increase nearly 10% in the coming year. The forecast showed the Dow expanding on its overbought condition.
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 chart. Three to nine analysts was considered optimal for a valid projection estimate.
A beta (risk) ranking for each analyst rated 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 (3): Ten Dow DiviDogs to Net 11.9% to 18.5% by January 2015
Five of the top yielding dividend Dow dogs were verified as top gainers for the coming year by analyst 1 year target prices. So this month the dog strategy as graded by wall street wizards is 50% accurate.
Ten probable profit generating trades from $1k invested in each were revealed by Yahoo Finance and indexARB.com data by 2015 were:
JPMorgan Chase & Co. netted $185.08, based on dividends plus a mean target price estimate by thirty-two analysts less broker fees. The Beta number showed this estimate subject to volatility 97% greater than the market as a whole.
Coca-Cola Co. (KO) netted $169.09 based on dividends plus a mean target price estimate from seventeen analysts less broker fees. The Beta number showed this estimate subject to volatility 75% less than the market as a whole.
Verizon Communications netted $161.59, based on dividends plus mean target price estimate from twenty-five analysts less broker fees. The Beta number showed this estimate subject to volatility 99% less than the market as a whole.
General Electric netted $160.28 based on a mean target price estimate from thirteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 18% greater than the market as a whole.
Chevron Corp. netted $158.02 based on a mean target price estimate from nineteen analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 12% greater than the market as a whole.
Johnson & Johnson (JNJ) netted $132.50, based on dividend plus mean target price estimates from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 46% less than the market as a whole.
AT&T Inc netted $131.63 based on estimates from twenty-four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 74% less than the market as a whole.
Wal-Mart Stores (WMT) netted $131.33 based on dividends plus the mean of annual price estimates from twenty-two analysts less broker fees. The Beta number showed this estimate subject to volatility 67% less than the market as a whole.
Du Pont (E.I.) (DD) netted $120.17 based on target estimates from sixteen analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 69% greater than the market as a whole.
Procter & Gamble netted $119.38 based on dividends plus mean target price estimate from eighteen analysts less broker fees. The Beta number showed this estimate subject to volatility 66% less than the market as a whole.
The average net gain in dividend and price was about 14.7% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 23% less than the market as a whole.
Stocks listed above were suggested only as possible starting points for your Dow dog dividend stock purchase 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.
Disclosure: I am long CSCO, CVX, GE, INTC, MCD, MSFT, PFE, T, VZ. 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. (More...)
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