2015 Dogs of the Dow: 10 Dividend Stocks You Should Watch This Year

Source: Wikimedia Commons, courtesy Geo Swan.

In recent years, investors have discovered the immense value of dividend-paying stocks, which have been one of the few reliable sources of portfolio income in a low-interest-rate environment that has left bonds, bank CDs, and other income-producing investments behind. For those investors who like to focus on blue-chip dividend stocks of the highest quality, turning to the 30 stocks of the Dow Jones Industrials (^DJI 0.69%) is a natural move, and a strategy known as the Dogs of the Dow highlights 10 stocks that often outperform the Dow while paying out high yields in the process. Let's take a look at the 10 newest Dogs of the Dow and see how the strategy has fared in the past.

The 2015 Dogs of the Dow

Source: DogsoftheDow.com.

Changes to the Dogs
The way to determine the Dogs of the Dow is simple. At the beginning of each year, you take the 30 Dow stocks and rank them by dividend yield. The 10 highest-yielding Dow stocks become the Dogs of the Dow for that year. The strategy then has you simply hold those stocks all year, collecting dividend payments. At the end of the year, you look at yields again and make any necessary changes to the list of 10 stocks.

For 2015, seven of the 10 Dogs of the Dow were on the list last year. But the big change came in the technology sector, where Intel (INTC -0.38%), Microsoft (MSFT 1.65%), and Cisco Systems (CSCO 0.37%) all fell out of the group. The reason: All three stocks posted gains of 20% to 40% for the year, pushing their yields down by as much as a full percentage point in the case of Intel.

In their place, 2014 underperformers ExxonMobil, Caterpillar, and Coca-Cola filled out the 2015 Dogs. Exxon's entry stemmed from the plunge in oil prices late last year. Its stock price fell almost 9% in 2014, helping to push its yield up half a percentage point since the beginning of last year. Similarly, Caterpillar and Coca-Cola both struggled from sluggishness in their respective sectors, with Caterpillar taking a collateral hit from potential declines in energy-industry capital spending and Coca-Cola continuing to fight the trend away from sugary carbonated beverages.

Can you count on the Dogs of the Dow?
The Dogs of the Dow strategy is easy to follow, but its results are somewhat mixed. In 2014, the strategy came close to breaking even with the overall Dow, with the tech stocks mentioned above helping rescue the Dogs from poor performance from telecom and energy-related companies. On a total-return basis, the Dogs eked out a small victory, but only after their beefy dividends were included.

Past years have seen varying performance from the Dogs of the Dow. In 2013, the Dogs beat the Dow by about 4 percentage points, bouncing back from a tiny underperformance in 2012. But in both 2010 and 2011, the Dogs topped the Dow by 5 to 6 percentage points. That has led many investors to start taking the strategy more seriously.

Source: Flickr user 401(k) 2013.

From a longer-term perspective, the Dogs of the Dow's track record isn't as strong. In 11 of the past 19 years, the Dogs have underperformed the Dow. Because the Dogs do best when one year's lagging stocks bounce back, market environments in which winners keep climbing and losers keep falling typically don't give the Dogs the outperformance that investors want to see.

The Dogs of the Dow strategy is far from perfect, and you can't count on the Dogs to always outperform the Dow or the rest of the stock market. But it is a simple way to choose high-quality dividend stocks from among the best-known companies in the world, so the Dogs of the Dow has plenty of popular appeal and tends to deliver solid returns year in and year out.