This monthly report series was initiated in December 2011 with dog dividend methodology applied to each of eight major market sectors. In alphabetical order, those sectors were: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology and utilities.

The ninth sector, conglomerates, according to Yahoo Finance, contained just eight firms, five of which paid dividends. Thus the reporter declined to apply dog metrics a sector containing fewer than ten dividend equities.

Dogs of the Index Metrics Selected Ten Top Basic Materials Stocks

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 high yielding stocks whose prices increased (and whose dividend yields therefore decreased) could be sold off once a 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 was sorted by yield as of July 2 using Ycharts.com to reveal the top thirty. Market performance of these thirty selections was then reviewed using four months of historic projected annual dividend history from Yahoo Finance along with annual divided projections adjusted for market realities.

Thereafter, this article assessed the relative strengths of the basic materials sector top ten dividend dogs as of June 1 and July 2 opening prices vs. the Dogs of the Dow May 11 and June 14 stock lists. Annual dividends from $1000 invested in the ten highest yielding stocks in the sector and index were compared to the aggregate single share prices of those top ten stocks in each.

Basic Materials Dividend Dogs

Top ten basic materials stocks paying the biggest dividends in May largely represented oil and/or gas industries: Enerplus (ERF); Whiting (WHX); Pengrowth Energy (PGH); QR Energy (QRE); Sandridge Permian Trust (PER); MV Oil Trust (MVO); Exterran Partners (EXLP). Only three of the top ten basic materials firms do not mention oil or gas in their industry description: Great Northern (GNI); Oxford (OXF); Rhino (RNO).

In June, the top ten added four oil industrials as replacements, and in the process, cast Oxford out of the dog pound: Whiting USA Trust II (WHZ); Chesapeake Granite Wash Trust (CHKR); Compressco Partners (GSJK); VOC Energy Trust (VOC).

Dividend vs. Price Results Compared to Dow Dogs

Below is a graph of the relative strengths of the top ten basic materials dividend sector stocks by yield as of market close 7/2/2012 compared to those of the Dow. Using six 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 created the data points for each month shown in green for price and blue for dividends.

Conclusion: Basic Material Dogs Still Chased by That Bear

The May and June basic materials collections of mainly oil and gas dividend payers have stayed the bearish course since February, when this sector came under attack. Aggregate dividends from $10k invested in each of the top ten stocks have increased 30.95%, since while aggregate prices fell 31.67% for the period.

Meanwhile, the Dow index has stabilized in a overbought pattern where aggregate single share prices exceed the annual estimated dividends from $1k invested in those ten by $75 or 18.75%.

Basic materials sector top ten dogs now show $987 or 246.72% more dividends (with equally bigger risk) at a $265 or 55.86% lower aggregate share price for the top ten dogs than those of the Dow as of July 2.

Conclusion Too:

2013 Projects 39.17% Net Gain from These 10 dogs

Top ten dogs for the Basic Materials sector were graphed below to show relative strengths by dividend and price as of June 1, 2012 and those projected to June 1, 2013.

Historic prices and actual dividends paid from $1000 invested in the ten highest yielding stocks and the aggregate single share prices of those ten stocks created the data points for 2012. Projections based on estimated increases in dividend amounts from $1000 invested in the ten highest yielding stocks and aggregate one year target share prices from Yahoo Finance created the 2013 data points green for price and blue for dividends.

Yahoo projected 18.17% lower dividends for this group, while price was projected to increase by 18.61% in the coming year. Probable profit generating trades revealed by Yahoo for 2013 were Enerplus Corporation netting $792.74, Pengrowth Energy Corp. netting $874.82, QR Energy netting $524.74, MV Oil Trust netting $376.20 and Exterran Partners netting $591.48 this year to make the total gain 39.17% on $10k invested.

A summary will conclude this series of articles each month showing comparative results of yield and price for all eight sectors reported: basic materials, consumer goods, financial, healthcare, industrial goods, services, technology, and utilities. Stay tuned also for periodic updates on how well or whether the projected gains for 2013 hold.

By Jeffrey R. Kosnett

You can still safely add these high-yielding investments to your portfolio.

Investors’ relentless search for better yield is the number-one takeaway from my recent sojourn to Chicago for the annual Morningstar investment conference, a gathering of 1,900 investors, advisers, fund managers and journalists. The meeting featured hours of scary warnings about the economy, the markets and our dysfunctional political system. On the subject of U.S. stocks, I sensed widespread unease and lack of interest throughout the exhibit hall.

One notable exception was Brian Rogers, the manager of T. Rowe Price Equity Income (symbol PRFDX), who also serves as chairman of the Baltimore-based fund giant. Rogers said today’s pervasive pessimism about stocks reminds him of 1982, which followed a mostly lost decade for stocks but marked the unexpected start of a powerful 18-year-long bull market.
But behind the fear — or because of it — I found a clear preference among this gang for investment income, whatever the source. The higher the yield, the more enthusiasm any category seemed to generate: high-yield and emerging-markets bonds; short-term bond funds as an alternative to cash; real estate and income-oriented energy investments; and exotic go-anywhere funds. A flock of me-too investments are chasing the same few names in such popular areas as foreign bonds and master limited partnerships. That worries me, but I couldn’t find any pros who shared my concerns because, I’m guessing, these categories are performing so well.

Maybe the obsession with high income will eventually burn investors, as the dot-com and housing bubbles did in the late ’90s and mid ’00s, respectively. But with the U.S. growing a little and many developing nations still expanding rapidly, the world is unlikely to blow up the way it did in 2008. And that suggests to me that you still have a window of at least one more year to add high-yielding investments to your portfolio safely.

Here are three income sectors I favor. It’s not too late to get into them or to add money to existing investments.

Ultra-Short Bond Funds

The mission here is to earn one-half to one percentage point more (after fees) than you can get with a money-market fund with minimal risk. These funds own assorted bonds, mostly corporates, that mature in no more than two or three years. The median yield of ultra-short funds is about 0.8% today, and a few yield more than 2% (it’s best to avoid those because they’re almost certainly concentrated in lower-quality debt). Over the course of a year, their net asset value per share should swing by no more than 1%. If you have $50,000 in a money-market fund earning zero, switching to an ultra-short fund promises to be worth $400 or so in additional pretax income per year. A move of this sort won’t change your life, but it will provide enough income to fix your car or cover a fun getaway weekend. So think of ultra-short bonds as a kind of rewards category rather than a serious income investment.

The category has a checkered past. In 2007 and 2008, several ultra-short funds lost more than 10% by mishandling derivatives or holding subprime mortgage debt when the credit markets froze. One offender was Fidelity Ultra-Short Bond (FUSFX), which saw its NAV drop from about $10 a share to $8. Chastened by this breach of trust, Fidelity last year launched Fidelity Conservative Income Bond Fund (FCONX), which, as its name suggests, is designed to guard against another implosion (funds in boldface are those I recommend). The fund has an average maturity of seven months, yields 0.67% and over the past 12 months has traded in a narrow range, between $9.97 and $10.01 per share. Fidelity’s highest bond honcho, Bob Brown, says the fund will never have “structured products” (a term that includes some of the stuff that ruined Fidelity Ultra-Short Bond) or low-grade foreign debt. He put enormous emphasis on those points. Good, because Fido can’t afford another catastrophe.

There are dozens of other ultra-short bond funds. Don’t pay a sales charge or high expenses, and scan the holdings to see if you recognize all or most of what’s inside. Check shareholder reports and Morningstar.com to make sure a fund hasn’t sustained any serious quarterly losses since 2008 and, preferably, none during the financial crisis.

High-Yield Bonds

Moving from the low-income area toward funds paying 5% and up, everyone’s favorite idea appears to be corporate junk bond funds. (One speaker said he’d rather have 100% of his money in high-yield bonds than 100% of it in Treasuries, and on that point I agree).

I spoke to several junk bond fund managers about my concern that any segment that is so popular with the public and in which pessimism is absent often tends to fall apart before long. But I was persuaded by the pros I spoke with that junk is worth riding until at least 2013. Matt Freund, who co-manages USAA High Income Fund (USHYX), says that prior to previous junk corrections and bear markets, borrowers would pitch new issues with all kinds of “sloppy features” and “silly structures” designed to benefit the borrower. (I’ll skip the details.) Freund says that’s not happening now. He and other junk-bond pros praise issuers of junk bonds for refinancing debt to save on credit costs, building cash and generally tightening their operations.

Moreover, several managers say, junk provides an excellent defense against rising rates. In fact, studies show that junk bonds perform better in rising-rate environments than in falling-rate environments. You can find plenty of good no-load junk funds, including USAA High Income, yielding 6.6% and up.

Emerging-Markets Bonds

While many speakers mentioned Europe’s troubles, creative guys such as Michael Hasenstab, global bond chief for Franklin Templeton, pointed out that economies are improving dramatically in places such as Malaysia, Indonesia and Mexico. His main argument is that Asia’s high-growth countries have much lower ratios of government and personal debt relative to the size of their economies than even the U.S. and Germany, never mind Italy and Spain. Over time, government bonds and corporate bonds issued in those emerging countries, whether priced in dollars or in local currency, should gain in value or at least hold their value as rating agencies raise their assessments of those emerging nations. Meanwhile, emerging-markets bond funds pay 5% and better.

Templeton Global Bond Fund (TPINX), co-managed by Hasenstab, is a fine choice, though it does not invest exclusively in emerging markets. It also charges a commission (it’s a great pick if you can get it without a load, as we at Kiplinger can through our 401(k) plan). Be aware, too, that the fund uses derivatives. “There are ways to maneuver with instruments so we can invest [in some countries] without ever touching an underlying bond,” says Hasenstab. In other words, he can use options, futures, swaps and who-knows-what to create synthetic Indonesian bonds or bet on what’s going to happen to the Argentine peso. I trust Templeton to employ these things judiciously.

A purer play on emerging-markets bonds is Fidelity New Markets Income (FNMIX), a member of the Kiplinger 25, the list of our favorite no-load mutual funds. DoubleLine, TCW and T. Rowe Price also offer good choices.

If you’re counting on fixed-income investments to produce steady revenue streams coming in the door, then you can forget about the government. Treasury bills and U.S. bonds offer some of the lowest payouts in memory, and if Federal Reserve Chairman Ben Bernanke has his way, that will be the case for the next several years, as well. He wants to keep rates very low to help the economy get up off of the mat.

You could turn to the corporate bonds offered up by blue-chip stocks. They’re quite safe, and typically offer yields in the 3 percent to 6 percent range. But for some investors, that’s not enough, especially when you can find investments that yield 10 percent or more.

Of course, such a high-yielding investment should raise your eyebrows. If it were a risk-free rock-solid yield, then many investors would have already bought them, which would effectively push down the yield back into the single digits.
Still, you need not avoid the group of ultra high-yielders completely. Some of these high-yielders have built up a decent track record, and though they made need to eventually reduce their payouts, the yields could still remain quite respectable.

Here are five double-digit yielders for you to consider.

Two Harbors: 15.6% yield

Real estate investment trust Two Harbors trades residential mortgage-backed securities (RMBS) , which are bundles of both prime and subprime loans. To help deliver high yields, the company uses borrowed funds to magnify returns on equity.

Since most of the income is paid out in the form of dividends, this stock doesn’t move very much: It has traded between $8.50 and $10.50 for the past two years. Yet investors in this stock mainly care about the yield, which is currently 15 percent.

Of course, exposure to both RMBS and the company’s own debt is likely too scary for some investors. And since this company began operations after the mortgage meltdown of 2008, there’s a limited track record. How would Two Harbors fare if mortgages collapsed again? Probably not very well. Still, the odds of that happening appear less likely with each passing quarter, as the housing market starts to stabilize.

However, an outright collapse of the stock market isn’t the real risk. Instead, it’s that the housing market will start to get healthier, and more investors will be comfortable buying up RMBS, pushing their yields down. As profit spreads tighten, Two Harbors will simply make less, and the dividend may fall as low as $1 a share. Still, that equates to an almost 10 percent yield at current prices.

As of the most recently reported quarter, Two Harbors was one of Appaloosa Management’s holdings.

Chesapeake Granite Wash Trust: 13.7% yield

Chesapeake Energy’s CEO Aubrey McClendon is too clever by half. He’s spent the past few years buying and selling oil-and-gas-related assets and now has put the company’s stock at risk. Chesapeake’s base of assets is formidable, but the company’s near-term debt obligations are even more so.

One of McClendon’s balance sheet tricks was to sell off the profit stream from some of its energy fields in the form of the Chesapeake Granite Wash Trust in late 2011 (the company owns three-fifths and the public owns the rest). The $19 initial public offering initially ran to $30 in March, 2012, but is now down below $20, creating an eye-popping dividend yield. Much of the blame goes to the sharp slump in natural gas prices, which threaten to impede cash flows — and Chesapeake Granite Wash’s dividend.

Yet investors should know that the parent company, Chesapeake Energy, will have to forego the rights to a share in the cash flow if the cash flow dips. Still, cash flow has been so sharply reduced that Chesapeake had to cut the quarterly dividend to 66 cents a share, below the 74 cents a share that many investors had been expecting.

Right now, there is some debate about whether the dividend reduction was just a one-time measure, or the start of a trend. If you’re a far-sighted investor, it doesn’t matter. Payouts may fall even further, pushing this yield into the high single-digits, but when oil and gas prices rebound (as they invariably do), the payouts will rise again.

More to the point, that sub-$20 stock price won’t last. An eventual move back to the $30 level seen a few months ago implies 50 percent upside, plus that eventually restored robust payout.

Whiting USA Trust: 16.3% yield

Whiting USA Trust is the income-sharing arm of Whiting Petroleum. The company receives royalties related to sales of oil and natural gas on revenue from oil and natural gas producing properties.

If you thought there’s a catch for such a high-yield, you’re right. The properties from which the trust earns royalties are depleting assets. The trust terminates when 9.11 million barrels of oil equivalent have been produced and sold from the properties. Thus far, a little more than half of that target has been met, and the trust’s sponsors anticipate a 10 percent annual decline in the payout until the oil fields’ quota is met, perhaps in 2016 or 2017.

Annaly Capital Management: 12.9% yield

Annaly Capital Management is similar to Two Harbors, which was discussed earlier. A key distinction is that it has a much longer track record — and it’s pretty impressive — which may account for the slightly lower yield: Investors may see this as a somewhat safer play thanks to management’s track record.

Annaly has generated positive free cash flow in every year of its existence, including the distressing years of 2008 and 2009. The annual dividend now appears stuck in the $2.50 a share range and is likely to stay in that area as long as interest rates (and hence the company’s borrowing costs) stay low.

Cohen & Steers Global Income Builder: 11% yield

Mutual fund Cohen & Steers Global Income Builder employs a very unusual strategy — but it works. The fund invests in real estate investment trusts, master limited partnerships, and utilities. The twist: The fund buys up stocks, but also uses options strategies such as covered calls to produce income.