24 of 68 S&P 500 Index stocks showed price gains and free cash flow yields greater than dividend yields as of 3/13/17. Those 24 were tagged “safer” with gains and cash to cover dividends.
Top 10 “safer” March S&P 500 Index annual yields ranged 4.41%-9.21% from NAVI, OKE, T, M, KSS, VTR, STX, HST, SPLS, CTL. Their cash flow yields ranged 5.32%-29.04%.
Besides safety margin, S&P 500 dogs also reported payout-ratios (lower is better), total annual returns, and dividend growth, as of 3/13/17 to further validate their strength. Total annual returns gauged price action.
Matched against top ten Dow Dogs, the “safe” S&P ten produced 49% more dividend at 41% of the Dow Dog price.
Analyst one year targets projected top ten “safer” S&P500 stocks with 61.36% more gain from $5k invested in the lowest priced five than from $5K invested in all ten.
The Dividend Dogs Rule
The “dog” moniker was earned by stocks 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 specifically, these are in fact best called “underdogs.”
Which Sectors Are “Safer” For The S&P 500?
Ten of eleven Morningstar sectors were represented by the 24 firms whose dividends were bolstered by rising share price and adequate cash as of March 13. The sector representation broke out thus: Communication Services (2); Consumer Cyclical (4); Real Estate (2); Technology (3); Energy (3); Financial Services (3); Utilities (2); Consumer Defensive (2); Healthcare (2); Basic Materials (1); Industrials (0).
Top ten S&P 500 “safe” dogs for dividend yields by this screen as of March 13 represented the first seven sectors on the list above.
S&P 500 Index Firms With “Safe” Dividends
Periodic Safety Inspection
You see grouped below the list that had positive annual price gains and passed the S&P 500 Index dog “safety” check with sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the bold face “Safety Margin” column.
Corporate financial solvency however is readily overturned by a conniving or tightwad board of directors promoting company policies cancelling or varying the payout of dividends to shareholders. On the list above, for example, CenturyLink (CTL) cut its dividend from $0.725 per quarter to $0.54 in March of 2013. Valero Energy (VLO) cut quarterly dividend from $0.13711 to $0.0457 in February, 2009 to preserve resources.
The 3 additional columns of financial data, listed after the Safety Margin figures above, reveal payout ratios (lower is better), total annual returns, and dividend growth levels for each stock. Total annual returns gauged the price direction of the past year. This data is used to reach beyond yield to select reliable payout stocks. Positive results in all five columns after the dividend ratio is remarkable as a solid financial signal.
Dividend vs. Price Compared to Dow Dogs
Ten top “safe” S&P 500 Index dividend dog stocks by yield were graphed below as of 3/13/17 and compared to those of the Dow. Annual dividend history from $1000 invested in each of the ten highest yielding stocks and their aggregate single share price created the data points shown in green for price and blue for dividends.
Actionable Conclusions: (1) S&P 500 Index Dogs Charged As (2) Dow Dogs Retreated
Ten top “Safe” S&P 500 Index dogs increased in price as dividends fell after February to set their charge. Aggregate dividend from $10k invested as $1k in each of the top ten stocks fell 2.85% since February while total single share price of those ten rose 9% for the period.
The S&P “safer dividend” top ten moved closer to the overbought zone but managed to stay over $205 away from becoming an overpriced portfolio like the Dow dogs.
Meanwhile, Dow dogs barely reduced their overbought level. The Dow 10 showed an annual dividend uptick from $10k invested as $1K in each of the top ten, up 0.27% after February, while aggregate single share price dropped 0.36%.
As a result, the Dow dogs’ overbought condition (where aggregate single share price of the ten exceeded projected annual dividend from $10k invested as $1k in each) slightly suffered.
The Overbought Dow
Since March 2016 when the overbought gap between low dividend from $1k investments and high aggregate top ten price was $309 or 78%, the chasm grew to $490 or 134% by November 2016 but the January gap retracted to $450 or 122%. February pushed the gap up to $476 or 132%. March managed $463 or 127%.
The Dow Dogs remain overbought and overpriced. Meaning, these are low risk and low opportunity Dow dogs. The Dow top ten average price per dollar of annual dividend was $27.99 March 13.
In opposition to the Dow, Safe S&P 500 dividend dog top ten average price per dollar of annual dividend was $19.00 as of 3/13/17. That is 50% less than the price for a dollar of Dow annual dividends.
To quantify top dog rankings, analyst mean price target estimates provided a “market sentiment” gauge of upside potential. Added to the simple high yield “dog” metric, analyst mean price target estimates provided another tool to dig out bargains.
Actionable Conclusion (3): Wall St. Analysts Cast A 6.44% 1 yr. Average Upside and 9.97% Net Gain From the 24 “Safer” S&P 500 Stocks
Top dogs on the “Safe” S&P 500 stock list were graphed above to compare relative strengths by dividend and price as of March 13, 2017 with those projected by analyst mean price target estimates to the same date in 2018.
Historic prices and actual dividends paid from $10,000 invested as $1K in each of the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points applied to 2017. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest yielding stocks and aggregate one year analyst mean target prices as reported by Yahoo Finance created the 2018 data points in blue for dividend and green for price. Note: one year target prices from one analyst were not applied (n/a).
Analysts projected an 6.2% lower dividend from $10K invested as $1k in the top ten March S&P 500 dogs while aggregate single share price was projected to increase by 2.8% in the coming year.
Notice the mid-year crossing pattern where these “Safer” S&P 500 dogs join the Dow in overbought lethargy.
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 above chart. Three to nine analysts were considered optimal for a valid projection estimate. Estimates provided by one analyst were usually not applied (n/a).
A beta (risk) ranking for each stock was provided in the far right column. 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 opposed to market direction.
Actionable Conclusion (4): Analysts Predicted Top Ten S&P 500 “Safe” Dog Stocks to Net 10.9% to 26.6% Gains By March, 2018
Four of the ten top “safe” dividend S&P 500 dogs (tinted gray in the chart above) were verified as being among the Top ten gainers for the coming year based on analyst 1 year target prices. Thus the dog strategy for this S&P 500 group as graded by analyst estimates for February proved 40% accurate.
Ten probable profit generating trades were illustrated by YCharts analytics for 2018:
CenturyLink netted $265.59 based on dividends plus the median of annual price estimates from sixteen analysts less broker fees. The Beta number showed this estimate subject to volatility 25% less than the market as a whole.
Navient Corporation (NAVI) netted $264.63 based on mean target price estimates from nine analysts plus dividends less broker fees. A Beta number was not available for NAVI.
Macy’s (M) netted $168.03 based on twenty-three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 22% less than the market as a whole.
AES (AES) netted $157.86 based on estimates from ten analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 12% more than the market as a whole.
Staples (SPLS) netted $156.20 per estimates from fourteen analysts, plus dividends less broker fees. The Beta number showed this estimate subject to volatility 77% more than the market as a whole.
Qualcomm (QCOM) netted $131.56 based on target price estimates from twenty-six analysts, plus dividends less broker fees. The Beta number showed this estimate subject to volatility 31% more than the market as a whole.
Pfizer (PFE) netted $128.64 based on dividends plus median target price estimate from twenty-one analysts less broker fees. The Beta number showed this estimate subject to volatility equal to the market as a whole.
Williams Companies (WMB) netted $120.38, based on dividends plus target price estimates from nineteen analysts and broker fees subtracted. The Beta number showed this estimate subject to volatility 33% more than the market as a whole.
Target (TGT) netted $114.26, based on dividend, plus a median target price estimate from twenty-nine analysts, less broker fees. The Beta number showed this estimate subject to volatility 49% less than the market as a whole.
Valero Energy (VLO) netted $109.18 based on median target estimates from twenty-one analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to volatility 56% more than the market as a whole.
Average net gain in dividend and price was 20.2% on $1k invested in each of these ten “Safe” S&P 500 dogs. This gain estimate was subject to average volatility 1% more than the market as a whole.
Actionable Conclusion (5): (Bear Alert) Analysts Cast One “Safe” S&P 500 Dog To Put Down A 3.23% Loss By March, 2018
One probable losing trade revealed by Thomson/First Call in Yahoo Finance by 2018 was:
CenterPoint Energy (CNP) projected a loss of $32.31 based on dividend and a median target price estimate from fourteen analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 45% less than the market as a whole.
Dog Metrics Pulled Bargains From Lowest Priced “Safe” Dividend S&P 500 Stocks
Ten “Safer” S&P 500 firms with the biggest yields as of March 13 per YCharts data ranked themselves by yield as follows:
Actionable Conclusions: (6) Analysts Predicted 5 Lowest Priced, of Ten “Safe” Dividend High Yield S&P 500 Index Dogs, Will Deliver 18.74% VS. (7) 11.61% Net Gains from All Ten by March, 2018
$5000 invested as $1k in each of the five lowest priced stocks in the “safe” ten S&P 500 Index pack by yield were determined by analyst 1 year targets to deliver 61.36% more net gain than $5,000 invested as $.5k in all ten. The fourth lowest priced “safer” S&P 500 dog, CenturyLink showed the best net gain of 26.56% per analyst targets.
This distinction between five low priced dividend dogs and the general field of ten reflects the “basic method” Michael B. O’Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed 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. It’s also the work analysts got paid big bucks to do.
Caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.
The net gain estimates mentioned 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.