February Basic Materials Sector Dogs Chase A Bull

This monthly report series began in December, applying dog dividend methodology to each of eight major market sectors. In alphabetical order these sectors are: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

The ninth sector, conglomerates, contains just eight firms-- five of which pay dividends (according to Yahoo Finance). Thus the reporter declined to apply dogs of the index metrics to such a limited universe, declaring. "such a task is comparable to a dog show judge trying to evaluate a Chihuahua based on St. Bernard conformation standards."

Dogs of the Index Metrics Used to Select The Top Ten Sector Stocks

Two key metrics determine the yields that rank index or sector dog stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price of the stock declares the percentage yield by which each dog stock is ranked. Investors select portfolios of five or ten stocks in any one index or sector by yield to trade. They await the results from their investments in the lowest priced, highest yielding stocks they selected and pray that the price of every stock they now own climbs 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), reveals how low yielding stocks whose prices increase (and whose dividend yields therefore decrease) can be sold off once each year to sweep gains and reinvest the seed money into higher yielding stocks in the same index.

Comparative Methods Used

First, the entire list of basic materials sector companies is sorted by yield as of February 24 using Ycharts.com to reveal the top thirty. Market performance of these thirty selections is then reviewed using four months of historic projected annual dividend history from Yahoo Finance, with annual divided projections reviewed adjusted for market realities.

Thereafter, today's article goes on to assess the relative strengths of the basic materials sector top ten dividend dogs as of February 24 vs. the Dogs of the Dow January 10 stock list. Annual dividends from $1000 invested in the ten highest yielding stocks in the sector and index are compared to the aggregate single share prices of the top ten stocks in the sector and index.

Basic Materials Dividend Dogs

The top ten basic materials stocks paying the biggest dividends in January are mostly in the oil and/or gas industry: Whiting (WHX); Ferrellgas (FGP); Calumet (CLMT); Enerplus (ERF); BreitBurn (BBEP); Permian Basin Trust (PBT). Only four of the top ten basic materials firms do not mention oil and gas in their industry description: Great Northern (GNI); Oxford (OXF); Rhino (RNO) CVR Partners (UAN).

Vertical Moves in February's Basic Materials Dogs

In the past months, two firms-- one oil and gas and one steel and iron-- claimed the top of this list by yield. One Oil and gas firm (Torch Energy Royalty Trust (TRU)) slid off the top 30 list in January based on a revised annual dividend forecast of $.17 per share, leaving the top to the steel and iron company, Great Northern . In February, Whiting USA Trust price declined 5.3% resulting in a marked bump in yield. Meanwhile, Great Northern Iron annual divided projection was adjusted to equal that paid in 2011 while its share price increased 1.27%. Those two factors combined to allow Whiting to reclaim the lead yellow color tinted dog title for O&G firms.

Color code shows: (Yellow) firms listed in first position at least once between November 2011 and February 2012; (Cyan Blue) firms listed in tenth position at least once between November 2011 and February 2012; (Magenta) firms listed in twentieth position at least once between November 2011 and February 2012; (Green) firms listed in thirtieth position at least once between November 2011 and February 2012. Duplicates are depicted in color for highest ranking attained.

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Bullish vertical moves made since January 20 include the aforementioned GNI, with its share price increase of 1.27%; Ferrellgas Partners with a 8.62% price gain; Calumet Specialty Products Partners showed an 11% increase; BreitBurn Energy Partners with a .736% price gain; Enerplus Corporation with a 3.1% price gain; QR Energy (QRE) exited the top ten as a result of its 5.93% gain.

Bearish moves for the same period were experienced by Whiting USA Trust, with its aforementioned 5.3% price decline; Oxford Resource Partners showing a 20.27% price slump; Rhino Resource Partners with a 3.61% decline; CVR Partners made it into the top ten Basic Materials Sector dogs by yield after posting a 11.11% decline.

Dividend vs. Price Results vs. Dow Dogs

Below is a graph of the relative strengths of the top ten basic materials dividend sector stocks by yield as of February 24, 2012 compared to those of the Dow. Using four months of historic projected annual dividend history from $1000 invested in the ten highest yielding stocks each month, and the total single share prices of those ten stocks, creates the data points for each month shown in green for price and blue for dividends.

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Conclusion: Basic Material Dogs Chase a Bull

The February basic materials collection of 30 mainly oil and gas dividend payers showed multi-directional market performance during recent months when dividends and prices behaved in lock step rising and falling together at the monthly points surveyed. This month this sector came to be bullish, as other sectors in which aggregate dividends increase when aggregate prices fall.

Meanwhile, the Dow index moved to beyond convergence as dividends from $1k invested in the top ten nearly sank lower than aggregate total single share prices in February. The basic materials sector top ten show $653 more dividends (with equally bigger risk) at a $150 lower aggregate share price for the top ten dogs than those of the Dow as of February 24.

At the end of each month, two summaries will conclude this new series of articles by showing comparative results of yield and price for all eight sectors reported: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities.

Disclosure: I am long T, VZ, INTC, JNJ, CVX.

Disclaimer: This article is for informational and educational purposes only and shall 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 are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.