Morningstar / YCharts Sector Dogs Shed 8.5% To 33.3% Annual Gains

This report series was prompted by a Seeking Alpha reader request. Since the fall of 2011 I've reported possible buy opportunities in each of eight major market sectors as listed by Yahoo Finance: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology and utilities. A ninth Yahoo conglomerate sector had too few members to report.

In response to both the Seeking Alpha reader request and Ycharts.commigration to an eleven sector list, this report provides four actionable conclusions about top members of the Morningstar/YCharts (M/Y) sectors: basic materials; communication services; consumer cyclical; consumer defensive; energy; financial services; healthcare; industrials; real estate; technology; utilities.

These sectors were all subjected to screening based on a once per year trading system triggered by yield, "Dogs of the Index," used by many investors to determine the best bargains in dividend stocks. The dogs system empowers investors with all the wisdom and knowledge of well-paid wizards of investment and publishing for free, as investors select the highest yielding and lowest priced constituents in a collection of equities built by experts.

Sector results based on first, YCharts yield data and, second, Yahoo Finance historic price and dividend records, were compared based on relative strengths of (1) yield and (2) dividend vs. price gaps using projected annual dividends from $1,000 invested in the ten highest yielding stocks in each sector as of February 15. Results from the Dow index provided a baseline.

Abstracting all eleven sectors plus the Dow baseline index in one post delivered twelve currently undervalued stocks deemed by a quorum of analysts as showing significant upside price potential in addition to substantial dividend yield.

This effort responded to the overriding question, "which dividend stocks were good, better, best, bad, or ugly, after January?" The research was also in keeping with Yale professor Robert Shiller's observation: "People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes." Thus this article graphically depicted those gyrations.

Dog Metrics Selected Ten in Each Sector

Two key metrics determined the yields that ranked these sector dog stocks: (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.

Historically 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).

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. Prior to the publication of O'Higgins' book, Dow dogs were known by some market watchers as "fallen angels."

Sector Synopses

Ten dogs for each sector displayed their annual dividends from $1,000invested in those highest yielding stocks in the eleven sectors and one index compared to their aggregate single share prices to produce the summary graphs shown below:

Basic Materials Dividend Dogs

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The top basic materials stock paying the biggest dividend by yield as of February 15 according to M/Y was Great Northern Iron (GNI), a trust expiring in 2015. Two non-metallic miners were in second and ninth places, Rhino Resource Partners (RNO), and Alliance Holdings GP (AHGP). Four firms in third through sixth slots represented industrial metals and minerals: Natural Resources Partners (NRP); PVR Partners (PVR); Cliffs Natural Resources (CLF); Alliance Resource Partners (ARLP). Two Agricultural chemical firms placed in seventh and eighth, Terra Nitrogen Company (TNH), and Rentech Nitrogen Partners (RNF). One gold firm made the list in tenth place, Gold Resource (GORO).

Communication Services Dividend Dogs

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Top ten communication services stocks showing the biggest dividend yields per the M/Y screen as of February 15 represented five industries.Tops was the only foreign telecom firm listed, France Telecom (FTE). In second and third places were two of three firms listed as wireless providers, Portugal Telecom (PBI), and NTELOS (NTLS). The third wireless firm, VimpelCom Ltd. (VIP) placed ninth. Four domestic telecom firms placed fourth through seventh: Windstream Corporation (WIN); Frontier Communications (FTR); Consolidated Communications (CNSL); CenturyLink (CTL). In eighth place was a firm simply categorized as a telecommunication services firm, Oi SA, (OIBR). Lastly, in tenth place was United Online (UNTD), another telecommunication services firm.

Consumer Cyclical Dividend Dogs

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Top ten consumer cyclical stocks showing the biggest dividend yields per the M/Y screen as of February 15 represented eight industries. Tops was one of two publishing-books firm listed, Educational Development Corporation (EDUC). The other book publisher, Courier Corporation (CRRC) was seventh. Second dog, StoneMor Partners (STON) was the lone representative from the personal services industry. Two top ten dogs from the consumer services industry took third and fourth, Student Transportation (STB), and NutriSystem (NTRI). One rubber and plasticsfirm listed in fifth, Deswell Industries (DSWL). An ad agency, Charm Communications, (CHRM) was sixth. Gaming firm, Asia Entertainment & Resources (AERL) was eighth. Publishing firm, Valueline (VALU) was ninth, and auto parts company, Douglas Dynamics (PLOW) was tenth.

Consumer Defensive Dividend Dogs

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Top ten consumer defensive stocks showing the biggest dividend yields per the M/Y screen as of February 15 represented five industries. Tops was one of four cigarettes firms listed, Vector Group (VGR). The other cigarettes firms placed fifth, seventh, and ninth, Reynolds American (RAI), Altria (MO), and Lorillard (LO). A chain of grocery stores took second (RNDY). CCA Industries (CAW), the only personal products firm listed was third. Then, Cresud Sociedad An (CRESY), a food production company as fourth. Finally, three education and training companies finished of the top ten consumer defensive dogs in sixth, eighth and tenth slots: TAL Education Group (XRS); Ambassadors Group (EPAX), and Lincoln Educational Services Corporation (LINC).

Energy Dividend Dogs

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The top ten energy stocks showing the biggest dividend yields as of February 15 according to Y/M screens all represented oil and gas industries: SandRidge Mississippian Trust I (SDT), an independent was top dog; SandRidge Permian Trust (PER), another independent was second dog; BP Prudhoe Bay Royalty Trust (BPT), a refiner and marketer was third; QR Energy (QRE), another independent was fourth; Pengrowth Energy (PGH), a driller, was the mid-dog of ten; Penn West Petroleum (PWE), another driller, was sixth dog; Memorial Production Partners (MEMP), an independent, was seventh; LRR Energy (LRE), the fifth independent on the list was eighth dog; MV Oil Trust (MVO), a third driller was ninth; finally, Ferrellgas Partners (FGP) the second refiner and marketer on this list, was the tenth M/Y dog.

Financial Services Dividend Dogs

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Top ten financial services sector dogs showing the biggest dividend yields by the M/Y screen after January represented seven industries. Top financial services sector stock, California First National Bancorp (CFNB) was the only regional bank listed. Second dog, Arlington Asset Investment (AI), is on of three mortgage investment firms on the list. Other mortgage investors showed up in the fifth and eighth slots, Dynex Capital (DX), and Ellington Financial LLC (EFC). One of two credit services firms was third on the list Full Circle Capital (FULL). Fifth Street Finance (FSC), the other credit services firm took tenth place. One of three asset management firms in the top ten, Prospect Capital Corporation (PSEC) was fourth. The other asset managers were TICC Capital (TICC), in sixth, and MCG Capital Corporation (MCGC) in seventh. The ten financial services dogs for February were completed by KCAP Financial (KCAP), the lone diversified investment firm was ninth dog on the list.

Healthcare Dividend Dogs

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Five industries were represented by the ten healthcare sector stocks showing the biggest dividend yields as of February 15 by YCharts and Morningstar. Top healthcare sector stock PDL BioPharma (PDLI) was the only biotechnology firm in the top ten. AstraZeneca (AZN) in second position was one of six drug manufacturers, major on this list. Others were GlaxoSmithKline (GSK) in third, Bristol-Myers Squibb Company (BMY) in fourth, Merck (MRK) in sixth, Novartis AG (NVS) in eighth, and Eli Lilly and Company (LLY) in ninth,. Psychemedics Corporation (PMD), the fifth dog represented medical laboratories and research firms. Advocat (AVCA) providing long-term care facilities took seventh. Finally, Meridian Bioscience (VIVO) providing diagnostic substances took tenth and completed the top ten healthcare dogs.

Industrials Dividend Dogs

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Ten industrials sector stocks showing the biggest M/Y screened dividend yields February 15 represented just three industries. Top industrials stock by dividend yield was one of seven stocks representing the shipping industry: Diana Containerships (DCIX). Other shippers were in second through sixth positions as well as tenth: Globus Maritime (GLBS); Star Bulk Carriers (SBLK); Box Ships (TEU); Navios Maritime Partners (NMM); Capital Product Partners (CPLP); Knightsbridge Tankers (VLCCF). Business services firms took seventh and ninth places, Collectors Universe (CLCT), and R.R. Donnelley & Sons (RRD). Pitney Bowes in business services took eighth place to complete the top ten industrials dogs.

Real Estate Dividend Dogs

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Top ten real estate sector dogs showing the biggest dividend yields by Y/M's screen after January represented four industries. Top real estate sector stock, Two Harbors Investment (TWO), was one of six residential REITs. Others in that industry were New York Mortgage Trust (NYMT), in second, American Capital (AGNC), in third, Armour Residential REIT (ARR), fourth, CYS Investments (CYS), sixth, and Apollo Residential Mortgage (AMTG) in eighth. American Capital Mortgage Investment (MTGE), one of two diversified REITs in the top ten, was fifth. The other diversified REIT was AG Mortgage Investment Trust (MITT) in seventh. Invesco Mortgage (IVR), a mortgage investment firm, was ninth. The remaining REIT-retail industry was represented by Resource Capital Corporation (RSG), in tenth position.

Technology Dividend Dogs

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Top ten technology sector stocks from Yahoo Finance screening showing the biggest dividend yields February 5 represented ten industries. Top technology sector stock was Mind C.T.I. (MNDO) representing information technology services. Second techno dog, Cimatron (CIMT) represented technical and system software. Technical Communications Corporation (TCCO) a communication equipment firm took third place. Rimage Corporation (RIMG) a computer peripherals firm, took fourth. Simulations Plus (SLP) the number five techno dog represented business software and services. Communications Systems (JCS) represented communications equipment firms in sixth place. Seventh techno dog, Intersil Corporation (ISIL) represented semiconductors-broad line. RF Industries (RFIL) a diversified electronics firm was eighth. Lexmark International a computer based systems firm was ninth. Finally, in tenth place was United Online, another telecommunication services firm.

Utilities Dividend Dogs

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The top ten utilities sector stocks showing the biggest dividend yields February 15 by Y/M represented four industries: electric; gas; diversified; foreign. Top dog, Niska Gas Storage Partners (NKA) was one of six gas utilities. The other gas firms were in third, fifth, sixth, seventh, and ninth places: American Midstream Partners (AMID); Transportadora de Gas del Sur (TGS); Suburban Propane Partners (SPH); Amerigas Partners (APU); PAA Natural Gas Storage (PNG). Second place went to one of two diversified utilities firms, Just Energy Group (JE). The other diversified utility, TransAlta Corporation (TAC) was eighth. Atlantic Power Corporation (AT) the fourth utilities dog was the lone electric firm listed. One foreign utility, CPFL Energia (CPL) was listed tenth.

Dow Industrial Dividend Dogs

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Three of four technology firms led the Dow top ten showing the biggest dividend yields as of February 1, according to indexarb.com: (1) AT&T (T); (2) Verizon (VZ); (3) Intel Corporation (INTC); (9) Microsoft Corp. (MSFT). Three healthcare dogs placed thus: (4) Merck (MRK); (6) Pfizer (PFE); (8) Johnson & Johnson (JNJ). One basic materials firm was included (5) Dupont (DD). The rest of the Dow ten included one industrial firm, (7) General Electric (GE), and services firm, (10) McDonald's (MCD), which completed the ten top Dow dogs.

All Together Now

Each graph below shows six points of comparison between annual projected dividends resulting from $10,000 invested as $1,000 each in the top ten high yield stocks (blue points) versus the total prices of one share of each of the ten stocks (green points). Grouped together the graphs display comparative gyrations of eight sectors and the Dow index as of February.

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Sector Dogs Vie for Dividend Dominance

The following graph shows annual dividends projected from $1,000invested in each of ten stocks with the top yields in the eleven M/Y sectors compared to those of the Dow. The chart plotted projected yields as of six purchase points since March. Generally, projected yields increased in the sectors when average stock prices fell. When prices escalated yields dropped.

Relative yield strengths differentiated the sectors. The Dow baseline showed the lowest overall yield with a low flat trajectory down 3% since March 2012. Healthcare dividend yield was also down by 8% for the year; consumer defensive yield was up 6% overall despite falling 17% since October; technology yield increased 12% since March; consumer cyclical yield was up 2% for the year; utilities yield fell 5%; basic materials yield was up .5%; communications services sector vectored up 11% by yield for the year; financial services yields, however, were down 11%; energy yields were up 4% annually; industrials yields soared 20% for the year; meanwhile, real estate yields tumbled 9%.

Annual Dividends Forecast from $1k Invested in each of 10 Top Yielding Stocks in 11 Sectors and the Dow

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Relative Risk of Dogs by Sector Revealed by Dividend vs. Price Divergence

A reader request to "add relative financial data on the companies selected" for a previous article comparing indices by annual yield projections has inspired a simple tool to gauge investment risk. The tool is best applied prior to the purchase of any 5 or 10 Dogs of the Indexstocks. This information will continue to be reviewed periodically as one step toward Robert Schiller's admonishment to "make conservative preparations for possible bad outcomes."

Dogfight for Dividend Dominance Disclosed

To show risk, the gap between annual projected dividend (resulting from $10,000 invested as $1,000 each in the top ten highest yielding stocks) was compared to the aggregate price of one share each of those ten stocks in that same index or sector. These twelve representative market sectors and index displayed their relative divergence of dividend vs. price in the following order:

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The industrials sector ran away with top risk status in February as it leaped to 1481.43% of dividend divergence projected from $1000 invested in each of its top ten stocks from the aggregate single share price of those ten. Five sectors, communication services, financial services, consumer cyclical, technology, and real estate sectors all diverged in the 750% range. Energy showed 413.31% divergence; utilities showed 380.74%; consumer defensive came in at 248.5% basic materials showed a gap of 55.20%; healthcare diverged 52.23% between dividend and price. The average gap for the eleven sectors plus the Dow was 525.51% in February. Dow industrial top ten dogs dividends diverged (11.11%), as they succumbed to an overbought condition.

Actionable Conclusion: Analysts Forecast Dogs in 11 Sectors To Shed 8.5% to 33% Net Gains

Charts below for each sector show comparative net gains as of February 15, 2013, and those projected to February 15, 2014. Historic aggregate single share price of the ten highest yielding stocks created the numbers for 2013. Projections based on aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2014 numbers for each index.

Three to five dogs from each index were selected as sells based on highest net gain. The hypothetical sale of those stocks added to the projected dividends revealed the total net for each sector. Since $10k is the initial investment, the percentage net gain is easy to calculate for each.

The number of analysts contributing to the mean target price estimate for each stock is noted in the last column on the charts. Three to nine analysts is considered optimal for a higher probability projection estimate.

Energy Sector Analysts See Over 33% Net Gains

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Technology Analysts See Near 28% Net Gains

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Industrials Sector Analysts See Over 27.5% Net Gains

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Utilities Sector Analysts See Near 25% Net Gains

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Consumer Defensive Sector Analysts See Near 23% Net Gains

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Consumer Cyclical Analysts See Over 20% Net Gains

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Basic Materials Sector Analysts See Near 20% Net Gains

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Communications Services Analysts See Over 18% Net Gains

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Real Estate Sector Analysts See Near 14% Net Gains

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Financial Sector Analysts See Over 12.5% Net Gains

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Healthcare Sector Analysts See Over 8.5% Net Gains

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Actionable Conclusion Too: Sector Price Upsides and Top Trades Revealed

Top ten dogs powering each of these eight sector components were graphed below to show relative strengths by price upside estimates between February 15, 2013, and those projected to February 15, 2014. Historic aggregate single share price of the ten highest yielding stocks created the numbers for 2013. Projections based on aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2014 numbers for each index.

This graph of upside price potential shows positive price gains for each sector and the Dow ranging from 1.25% for the ten financial sector dogs to 25.72% for the ten technology sector dogs.

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Some Profit Generating Sector Dog Trades

These profit generating dog trades one year from now were revealed by analysts mean target prices for each of eight sectors. The list below is summarized from Yahoo Finance data. The opportunities listed are based on each sector's best mean target price for 2014 determined by one to thirty-one analysts.

Wayside Technology Group (WSTG) in the technology sector was named to net a 97.69% annual gain based on mean target pricing set by 1 analyst. (Top ten technology dogs were reviewed a total of 28 analysts for an average of 3 analysts per stock.)

Pengrowth Energy from the energy sector netted a 73.73% price gain based on a mean target price determined by 3 analysts. (Top ten energy dogs were reviewed a total of 42 analysts for an average of 4 analysts per stock.)

R.R. Donnelley & Sons from the industrials sector was projected to net a 73.73% net gain based on a mean target price set by 4 analysts. (Top ten industrials dogs were reviewed by a total of 35 analysts for an average of 4 analysts per stock.)

NutriSystem from consumer cyclicals was projected to net a 42.15% price gain based on mean target price determined by 4 analysts. (Top ten consumer goods dogs were reviewed a total of 15 analysts for an average of 2 analysts per stock.)

TAL Education Group in the consumer defensive sector was projected to net a 41.05% price gain based on mean target price determined by 8 analysts. (Top ten consumer goods dogs were reviewed a total of 52 analysts for an average of 5 analysts per stock.)

American Midstream Partners from the utilities sector was seen to net 34.73% for the next year based on a mean target price set by 2 analysts. (Top ten utilities dogs were reviewed a total of 41 analysts for an average of 4 analysts per stock.)

ARMOUR Residential REIT from real estate was estimated to show a net price gain of 28.15% based on a mean target price set by 8 analysts. (Top ten real estate dogs were reviewed a total of 73 analysts for an average of 7 analysts per stock.)

Alliance Resource Partners from basic materials netted a 27.19% price gain based on a mean target price determined by 8 analysts. (Top ten basic materials dogs were reviewed a total of 41 analysts for an average of 4 analysts per stock.)

United Online, Inc. from communication services was projected to net a 23.51% price gain based on mean target price determined by 3 analysts. (Top ten communication services dogs were reviewed a total of 71 analysts for an average of 7 analysts per stock.)

Microsoft Corp. from the Dow Industrials Index was determined to net a 20.62% price gain based on a mean target price set by 31 analysts. (Top ten Dow dogs were reviewed a total of 222 analysts for an average of 22 analysts per stock.)

Merck & Company from healthcare was determined to net a 19.08% price gain based on a mean target price set by 15 analysts. (Top ten healthcare dogs were reviewed a total of 70 analysts for an average of 7 analysts per stock.)

Dynex Capital from financial services showed a 15.64% net gain based on a mean target price set by 14 analysts. (Top ten financial services dogs were reviewed a total of 65 analysts for an average of 7 analysts per stock.)

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These Morningstar/YCharts sectors and their component stocks have ongoing stories to tell. These graphs, charts, and lists of companies will be updated again for publication periodically.

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 where noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.