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This Dow Investing Strategy Has Been All Bark and No Bite in 2018

By Sean Williams – Apr 9, 2018 at 7:51AM

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Seeking out the Dow's highest-yielding stocks hasn't been a rewarding strategy this year.

This year has been a real eye-opener for investors. After a market surge in 2017 that saw little in the way of volatility and almost lulled investors to sleep, volatility reared its head in a big way in February and March. Over just 13 calendar days between the end of January and beginning of February, the nearly 122-year-old Dow Jones Industrial Average (^DJI -1.71%) shed more than 2,700 points and screamed it was headed into correction territory -- a drop of at least 10% from a recent high -- which is quicker than any other correction in decades.

Don't panic!

But as we've hammered home recently, a correction is no reason to panic. Historically, significant drops in the market have marked strategically smart times for investors to buy new stocks or add to existing positions. Data from investing analytics firm Yardeni Research has shown that of the 36 corrections in the broad-based S&P 500 since 1950, each and every one, save for the current correction, have been erased by bull market rallies, often within a matter of weeks or months. 

A businessman counting a stack of cash in his hands.

Image source: Getty Images.

Recently, I covered a handful of strategies that investors could employ to survive this relatively normal, yet nominally abrupt, downturn in the Dow and general stock market. These strategies included buying an exchange-traded fund, an index fund, or investing in stocks at regular time intervals, regardless of where the Dow or S&P 500 are valued pointwise.

However, I also suggested investors consider buying dividend stocks. It's a logical solution on paper to a market downturn since dividend stocks usually have a time-tested business model, can help hedge against imminent downside, and allow you to purchase more shares of dividend-paying stocks with your stipend, accelerating wealth creation. Yet, had you employed this strategy with the Dow since the beginning of the year, you're probably not doing too well.

This investing strategy simply hasn't worked this year

The "Dogs of the Dow" is a popular investing strategy employed by select money managers and income seekers each year. It involves buying the 10 highest-yielding Dow stocks at the end of the previous year and holding them for a period of one year. Since the Dow is comprised of high-quality, multinational businesses, the presumption is that the superior yield of these 10 companies, along with their industry dominance, should lead to market-topping gains. But in 2018, that's not been the case. 

Company Year-to-Date Return
Verizon -8.86%
IBM 0.40%
Pfizer -1.35%
ExxonMobil -9.11%
Chevron -6.31%
Merck -3.09%
Coca-Cola -3.23%
Cisco Systems 9.19%
Procter & Gamble (PG -1.90%) -14.24%
General Electric (GE -1.31%) -23.04%

Data source: Yahoo! Finance. Table by author. Returns through April 5, 2018. 

Year to date through April 5, 2018, the Dow is lower by 1.68%. However, the average return for the Dogs of the Dow is a not-so-impressive minus 5.96%! Even with their higher yields, they've clearly underperformed the broader index and peers.

Interestingly enough, 12 of the Dow's 30 components are up for the year, but just two of those 12 are Dogs of the Dow. Meanwhile, four of the five worst-performing Dow components this year are Dogs of the Dow -- General Electric, Procter & Gamble, ExxonMobil, and Verizon.

Why the Dogs of the Dow is disappointing investors

You might be wondering what the heck is going on, since dividend stocks are usually such solid long-term performers. The answer appears to be twofold.

First, we're witnessing significant weakness in some core Dow components, which are also Dogs of the Dow. Consumer-products giant Procter & Gamble is down over 14% year to date and has been falling precipitously since reporting second-quarter operating results in late January. Though the company upped its long-term core earnings growth forecast, it also noted that retail competition is intensifying, resulting in lower organic sales for diapers and shaving products. 

A frustrated investor checking his portfolio on his laptop.

Image source: Getty Images.

Meanwhile, General Electric has been a train wreck. The diversified industrial powerhouse, which also happens to build locomotives, has seen its shares dip by more than 23% in 2018. Also reporting in January, General Electric's revenue badly missed Wall Street's expectations as the company realigns its focus on three operating segments -- aviation, power, and healthcare. Of course, exiting other underperforming segments while balancing an investigation from the Securities and Exchange Commission over a $6.2 billion after-tax charge isn't helping. 

The other issue is that we need to remember that dividend yield is a function of share price. If yields are rising, share prices might be falling. Sure, a dividend increase can boost shareholder yield, but so can an underperforming stock. If you're investing in the Dogs of the Dow, you may be buying into a group of recent underperformers. Giving those underperformers only 12 months to turn their businesses around simply isn't a reasonable time frame.

The good news is that there's plenty of time for these Dogs to turn things around. But for the time being, they're all bark and no bite.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool is short shares of IBM. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$61.91 (-1.31%) $0.82
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$28,725.51 (-1.71%) $-500.10
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
$126.25 (-1.90%) $-2.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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