An Even Simpler Path to Dow Dividend Riches?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Yesterday, we noted that even though the Dow Jones Industrials (DJINDICES: ^DJI  ) fell more than 2% this week, the average has still climbed more than 15% so far in 2013. Moreover, focusing on the 10 stocks with the highest dividend yields at the beginning of the year has been a market-beating strategy, adding another six percentage points to the year-to-date return.

But an even simpler strategy has done even better. By going even further and picking the five stocks with the lowest share prices out of those 10 high-yielders, you would be ahead by more than 24% this year -- topping the Dow by nine full percentage points. Given those results, should you jump on board the winning Dow dividend strategy?

Why are low-priced stocks winning?
A closer look at the stocks involved shows that the low-priced dividend stock method is working this year primarily because of one stock: Hewlett-Packard. The shares have jumped more than 85% as the company's turnaround strategy starts has taken shape, with the stock having made back much of the ground it lost in 2012.

But when you look at the other four low-priced high-yielders, you get very mixed results. AT&T (NYSE: T  ) is the laggard of the group, up just 1% so far this year. The telecom giant faces a new upsurge in competition in the U.S. market, with the third- and fourth-largest telecom companies in the market suddenly having found new life with the help of mergers and cash infusions. Meanwhile, AT&T has had its own growth plans thwarted for now, as attempts at international expansion have thus far proven unfruitful.

Intel (NASDAQ: INTC  ) has also put in lackluster performance, with gains of just 6%. The chip giant has started to make strides toward establishing a greater presence in the mobile market, but Intel's rivals are hardly standing still waiting for the company to catch up. Meanwhile, continued weakness in PC demand bodes ill for the company's core business, even as it tries to diversify into higher-growth areas.

Pfizer (NYSE: PFE  ) and General Electric (NYSE: GE  ) have done somewhat better, with gains of 13% to 14%. GE's continued concentration on the industrial side of its business has been a smart move, as the conglomerate keys in on the soaring energy industry from multiple angles including renewables and oil and gas drilling services. Meanwhile, Pfizer has successfully spun off its animal-health business and has done a reasonable job sustaining its revenue in the face of patent expirations, even though concerns about the future have limited its share-price gains.

Watch out ahead
The problem with simple strategies is that often, one stock's performance is enough to skew the entire strategy. That's the case with the low-priced high-dividend-yield strategy this year, and until HP drops out of the group -- likely next year -- you can expect the tech company to have a disproportionate influence on the success of the investing method.

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  • Report this Comment On August 18, 2013, at 9:45 AM, xahne wrote:

    hopefuly GE will raise its dividend again- Immelt has vowed to return more money to long suffering shareholders but GE's divdend in 2008 was $1.25. after vowing to not cut the dividend, he did just that. a 2/3 cut in 2009. the stock plunged to a low of 45.99 before slowly climbing back to the $24 range it sits today- it has taken 4 yrs to come back and the dividend sits at .76 annually still down close to 35% of the pre 2009 rate.

  • Report this Comment On August 18, 2013, at 9:25 PM, ssg13565 wrote:

    Short term strategies based on specific behavior of a class of stocks in the current year has been proven a loser, year after year. The specific formula for picking these stocks is hardly going to recur next year or in the next 3 months.

    A value strategy using dividends is a good one over the long time, but if you are trying to beat the market, or beat yourself up for not beating the market, then you are never going to be satisfied with your results.

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