Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Dow's Dividend Giants: Yield Isn't Everything

Dividends are important, and one of the best things about the Dow Jones Industrials (DJINDICES: ^DJI  ) is that every one of the 30 component stocks that make up the Dow pay a dividend. But when it comes to dividends, it is possible to have too much of a good thing if you simply pick stocks with the highest yields without considering any other factors. Let's look at one strategy that does exactly that and examine some of its shortcomings, including its emphasis on telecoms AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) and pharma stocks Merck (NYSE: MRK  ) and Pfizer (NYSE: PFE  ) .

Source: Tax Credits, Flickr.

Who let the Dogs out?
The popular Dogs of the Dow strategy does exactly what many dividend investors do: aim for the highest-yielding portfolio possible. Under the strategy, you choose the top-yielding stocks in the Dow Jones Industrials at the beginning of the year and hold onto them throughout the year, replacing them with the next crop of high-yield stocks the following year.

The Dogs of the Dow did extremely well last year, outperforming the Dow Jones Industrials by about four percentage points. But unfortunately, that track record hasn't been consistent. In 11 of the past 18 years, it has underperformed the Dow itself.

Part of the reason for the Dogs of the Dow's performance is that the same stocks tend to top the list each year. For instance, AT&T and Verizon have once again been named the top two Dogs of the Dow for 2014, marking the fifth consecutive year they've led the list. Moreover, looking further back at history, telecom stocks have consistently been among the top yielders of the Dow over the years.

But both AT&T and Verizon have much different businesses than they did when they joined the Dow. The days of utility-like legacy landlines are largely over, and both Verizon and AT&T have now become primarily mobile network giants, requiring huge capital outlays to support their growth. Recently, that has worked out well for AT&T and Verizon, as the revolution in mobile devices has given them pricing power almost to name their own price for data plans. Yet unlike their landline networks, which served them well for generations, mobile networks that adequately handled customer loads for a short period can become obsolete in the blink of an eye as new devices continually test their limits. Moreover, an imminent price war from smaller operators could destroy the competitive advantage that AT&T and Verizon have had for years, especially since neither Verizon nor AT&T have a substantial international presence.

Meanwhile, big pharma stocks Pfizer and Merck have been among the top five Dow Dogs for the past four years, as well as at various times in past years. Yet current high yields reflect vast uncertainty about their future. Investors foresaw years in advance that both Pfizer and Merck would have blockbuster drugs coming off patent, and share prices fell in light of that uncertainty, boosting dividend yields. These companies have seen their share prices stay relatively strong despite the huge revenues they've lost to generic competition. Yet the challenges in getting new drugs approved have plagued both Merck and Pfizer recently, forcing the companies to accept setbacks from time to time. Eventually, both companies will likely find new blockbuster prospects. But until then, dividend investors will have to be careful to make sure earnings stay high enough to sustain their payouts.

It's tempting to look at the highest-yielding stocks in the Dow Jones Industrials as sure things. But relying solely on yields can create a big trap if you're not careful.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2014, at 1:11 PM, pac1investor wrote:

    In the world of mergers and acquisitions, there is one very promising medical company and a premium acquisition target for giant pharma/tech companies. That is ISORAY, INC (ISR).

    Whereas high valued medical companies are still in discoveries and experimentations for reliable cancer-treatment, ISORAY Inc already boasts of Cesium-13, an FDA-cleared and holds a CE mark for international sales in seed form for the treatment of brain cancer, prostate cancer, lung cancer, ocular melanoma cancer, colorectal cancer, gynecologic cancer, head and neck cancer and other cancers throughout the body. The treatment can be deployed using several delivery methods including single seed applicators, implantable strands and seed sutured mesh. IsoRay also sells several new implantable devices, including the GliaSite® radiation therapy system.

    Also IsoRay, a medical technology company and innovator in seed brachytherapy and medical radioisotope applications, announced last month the publication of the first major peer reviewed study showing improved results using IsoRay's Cesium-131 seeds in the treatment of gynecologic cancer. A so undervalued company poised to emerge in the radar screens of investors.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2961923, ~/Articles/ArticleHandler.aspx, 9/2/2015 5:54:22 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:36 PM
^DJI $16351.38 Up +293.03 +1.82%
MRK $52.98 Up +0.45 +0.86%
Merck & Co., Inc. CAPS Rating: ****
PFE $31.97 Up +0.61 +1.95%
Pfizer CAPS Rating: ****
T $32.82 Up +0.50 +1.55%
AT&T CAPS Rating: ****
VZ $45.35 Up +0.45 +1.00%
Verizon Communicat… CAPS Rating: ****