Investors have never been hungrier for income, and that hunger has led to renewed interest in investing strategies that focus on maximizing income. One simple strategy involves choosing the 10 highest-yielding stocks in the Dow Jones Industrial Average (DJINDICES:^DJI), known as the Dogs of the Dow. The Dogs have gotten a lot more attention lately as investors look to outperform the overall market while producing above-average levels of income from their portfolios.
One month into 2013, the Dogs of the Dow have a slight edge over the Dow's overall performance. Obviously, it's far too early for the Dogs to declare victory, but the trends that we've seen within the group could shed some light on what's to come for the Dow Dog stocks during the rest of 2013 and beyond.
How January went to the Dogs
Looking at raw numbers, the Dogs of the Dow just barely beat out the broader index with a return of 6.1% versus the Dow's 5.8% return. However, neither figure includes the dividends the Dow's component stocks paid during the month, and because the Dogs had a sizable yield advantage at the beginning of the year, the actual gap between the two strategies was likely somewhat wider than the raw price data shows.
Much of the Dogs' success owes to their inclusion of the Dow's top performer, Hewlett-Packard (NYSE:HPQ), within their ranks. HP rose 16% as the beleaguered tech company managed a modest rebound from its huge losses of 2012. At this point, HP hasn't had a chance to fully demonstrate a substantive turnaround for its businesses as unfavorable trends in the PC industry continue to plague the company and its rivals. But the bounce is long overdue and highlights one of the value-based elements of the Dogs of the Dow strategy: It often selects beaten-down stocks because low stock prices tend to boost dividend yields.
Several other Dogs were among the Dow's big winners in January. Pfizer (NYSE:PFE) rose 9% as it continued to show signs of strength despite having to recover from severe revenue losses owing to the expiration of patent protection on blockbuster drug Lipitor. Yet a promising pipeline of drugs and strategic moves designed to unlock shareholder value, including the initial public offering of its Zoetis animal health unit, have given shareholders more confidence that Pfizer will survive its plunge off the patent cliff and create new sources of revenue growth well into the future.
Another turnaround candidate, McDonald's (NYSE:MCD), gained 8% during the month. As recently as November, McDonald's had investors extremely worried that the fast-food giant's growth spurt was finally coming to an end, as the company reported its first drop in monthly same-store sales in nine years. Yet even though competition between McDonald's and its peers has ramped up both within the U.S. and in high-growth international markets like China, McDonald's has recognized some of its mistakes and has moved back toward some of its more successful past strategies, including emphasizing the company's value proposition to customers.
As it turned out, neither of the Dow's two losing stocks were among the Dogs. Verizon (NYSE:VZ) was the weakest-performing Dog, rising just 1% as it continues to deal with the mixed blessing of huge levels of smartphone sales. Investors tend to balk at the huge upfront subsidies that Verizon and its telecom rivals have to pay in order to make the most popular smartphone models more affordable. Yet what those same investors seem to forget is that Verizon makes up for those subsidies through extremely high-priced data subscription charges, with rates well above what those who use low-cost carriers have to pay on a monthly basis.
What will the rest of 2013 bring?
As a long-term investing strategy, the Dogs of the Dow have a checkered past, and looking too closely at monthly returns will give you a short-term trader's focus and distract you from the big picture. But with high-dividend stocks slightly outperforming their lower-yielding peers, the Dogs' success shows that investors' love affair with dividends still has some room to run.