Many investors who follow the Dow Jones Industrials (DJINDICES:^DJI) like the fact that all 30 of the Dow's component stocks pay dividends. For dividend investors seeking top yields, the Dogs of the Dow strategy has been an easy mechanical-investing method to follow, aiming at owning the 10 top-yielding Dow stocks as of the beginning of the year, holding them throughout the year, and then repeating the process at year-end. With 2014 approaching, one stock is certain to leave the Dogs of the Dow -- Hewlett-Packard (NYSE:HPQ) -- while General Electric (NYSE:GE) and Johnson & Johnson (NYSE:JNJ) look likely to make their exits as well.
The best Dog performer isn't even in the Dow anymore!
For Hewlett-Packard, getting kicked out of the Dow might have been an insult, but shareholders aren't complaining about the stock's 94% return so far this year. Even if HP had remained within the Dow, its dividend growth hasn't nearly kept pace with the price of its shares, sending its yield down from 3.7% at the beginning of the year to just 2.1% now. HP raises a huge amount of controversy among investors, as it saw revenue drop 1% and adjusted net income fall 13% in its most recent quarterly report. Yet to a large extent, investors are giving CEO Meg Whitman every benefit of the doubt in turning the company around, allowing her a very long time horizon by Wall Street standards to get the job done.
Why GE and J&J could be Dogs no more
Like HP, General Electric and Johnson & Johnson owe their exit from the Dogs to strong share-price performance. J&J is up 35% so far this year, and GE has climbed 28%, topping the Dogs list among stocks that are still in the Dow Jones Industrials. Their yields have fallen from the 3.5% to 3.6% range down to around 2.8% now.
For General Electric, 2013 provided the industrial company with the opportunity to return to its roots, deemphasizing its non-industrial businesses like media and finance and instead making big moves into aerospace and energy. GE owes much of its success since the financial crisis to having been courageous enough to make bold decisions to identify its best prospects. So far, those moves have borne a lot of fruit, as investors have benefited from solid earnings outperformance and greater confidence in the company's future.
Meanwhile, Johnson & Johnson has demonstrated its ability to innovate as well, with its pharmaceutical division in particular aiming at some exciting new areas for potential growth. With treatments for diabetes, hepatitis C, and various forms of cancer, J&J is competing effectively with its pharma rivals. Even though quality-control issues will remain a worry for investors who've seen the company get burned too often with recalls in past years, Johnson & Johnson appears poised to provide a rare combination of growth potential and defensive attributes for conservative shareholders.
Of course, anything can happen in the next few weeks, and these stocks might end up remaining among the Dogs of the Dow. As long as their shares don't drop, though, all three of these stocks have delivered an almost perfect 2013 to their shareholders.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of General Electric and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.