On Dec. 28, I examined and ultimately recommended three stocks that were classified as "Dogs of the Dow" under the classic Dow Jones Industrial Average (DJINDICES:^DJI) strategy. As we approach the end of the first quarter, it's a great time to check on these names, see how they have performed so far this year, and make some new predictions about where they may go from here. In recent history, this dividend driven strategy has performed well despite its simplicity. Will 2013 keep up the trend?
According to the website of the same name, Dogs of the Dow "is a stock picking strategy devoted to selecting the highest dividend paying Dow stocks." The theory is that those stocks within the index that have underperformed will naturally having higher dividend yields; as their stock prices fall and their dividends remain stable, the ratio of dividend to price improves. These out-of-favor stocks are expected to outperform or catch up across the subsequent year. Testing this approach historically shows that from "1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3% annually whereas the Dows averaged 11%."
Below is a brief discussion of the three Dogs that I profiled and recommended before the new year, as well as my current view of each:
This telecom giant, which currently offers a 4.9% dividend yield, is up just more than 4% thus far this year. Most of the recent news has centered on the company's release of the new BlackBerry (NYSE:BB) Z10. As the first U.S. carrier to get the device in its stores, AT&T has been fairly well covered, but according to a recent Wall Street Journal piece, AT&T retail locations are not breaking out the fanfare for BlackBerry's make-or-break product. The device is expecting corporate users to be the primary source of demand, but the apparent lack of enthusiasm does not reflect well on AT&T as a partner.
As the U.S. wireless market continues to expand, investing in any of the top companies has merit. With the stock's dividend yield more than twice that of U.S. Treasuries, it is hard to argue against maintaining a position in AT&T. The stock has not run so far this year as to warrant concern, and the healthy yield makes it a reasonable defensive play should the broader market start to struggle.
Verizon Wireless (NYSE:VZ)
This stock was the second-highest-yielding Dog heading into 2013, offering 4.7%. The stock is up 10.7% year to date, and its dividend yield now stands at 4.2%, making it the strongest performer of the three we are considering here. Surprisingly, the element of Verizon that makes it more attractive for the rest of the year than AT&T is not its wireless business, but rather its partnership with Coinstar's Redbox to deliver Redbox Instant to customers. This new service is more movie-centric than other streaming-video services offered by other established players, but simply pushing into this market segment may prove vital to the company going forward.
Furthermore, the addition of Redbox Instant to Verizon's portfolio justifies its higher performance thus far this year without making it a sell. The stock is currently trading at a trailing P/E of nearly 160, which does raise some concern, and AT&T has achieved better profit margins both historically and in the recent past. Still, as Verizon continues to spread its wings and offer more diversified services, I believe it will stand the company in good stead moving forward. Ultimately, with a dividend yield that is double that available from treasuries, I would own shares for the yield and allow the long-term stock performance to play out.
Intel, a.k.a. Chipzilla, carries a current dividend yield of 4.2% and is essentially flat for the year, down 0.3% as of this writing. The relentless decline of the PC market continues to weigh on shares as the company looks to make an important shift into mobile. While the company already enjoyed a fairly deep relationship with Motorola, it has made a major push to develop a new mobile operating system in partnership with Samsung and several other Asian telecom giants. The new system, called Tizen, is expected to be rolled out by late summer in the form of a premium smartphone option by Samsung. While no formal announcement has been made, you can be sure that the new devices will feature Intel chips to reward the company's support in the endeavor.
In addition to the above, Intel chips are used in Microsoft's Surface Pro tablets, which represents an important push into tablets for Intel. Intel is not abandoning its core chip business, but it is in the midst of a transition period. The stock's stagnation during this period is not surprising and should not keep you from maintaining a position in the stock.