"Dogs of the Dow" refers to one of the simplest dividend strategies to beat the market. Over the coming year, I'll track the Dogs' performance and keep you abreast of news affecting these companies.
The strategy
The Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average (^DJI 0.63%). The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would get not only large dividends but also gains in the stocks underlying those dividends.
High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:
- Many people fear that increasing dividend yields mean lower portfolio returns.
- Others believe that dividend payments mean that management believes the business is done growing.
Evidence compiled by Tweedy, Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.
Performance
After beating the Dow by 6.8% in 2011, the Dogs underperformed the Dow by 0.2% in 2012.
Check out the Dogs of the Dow's performance in 2013 so far:
|
Company |
Initial Yield |
Initial Price |
YTD Performance |
|---|---|---|---|
| AT&T |
5.34% |
$33.71 |
12.26% |
|
Verizon |
4.76% |
$43.27 |
23.66% |
|
Intel |
4.36% |
$20.62 |
20.10% |
|
Merck |
4.20% |
$40.94 |
13.32% |
|
Pfizer |
3.83% |
$25.08 |
15.53% |
|
DuPont |
3.82% |
$44.98 |
24.41% |
|
Hewlett-Packard (HPQ 1.96%) |
3.72% |
$14.25 |
52.12% |
|
General Electric |
3.62% |
$20.99 |
9.99% |
|
McDonald's |
3.49% |
$88.21 |
14.51% |
|
Johnson & Johnson |
3.48% |
$70.10 |
23.32% |
|
Dow Jones Industrial Average |
13,104 |
15.37% | |
|
Dogs of the Dow |
20.92% | ||
|
Dogs Return vs. Dow (Percentage Points) |
+5.55% |
Source: S&P Capital IQ as of May 11.
This week the Dow Jones Industrial Average was up 0.96%. The Dogs rose less than the Dow, bringing the Dogs' outperformance down to 5.55 percentage points better than the Dow.
There was no one big factor to point to for the Dow's rise this week, except for the continued momentum of the Dow itself. The Dow is hitting new highs as governments around the world take efforts to spur the economy through cutting their interest rates. In U.S. economic news, the weekly unemployment report came in at its lowest level in nearly five years, at 323,000 new claims. The four-week average moved down 6,250 to 336,750 -- the lowest level since 2007, and 30,000 less than last year's average of 360,000-370,000.
U.S. Initial Claims for Unemployment Insurance data by YCharts.
Movers and shakers
The biggest mover this past week among the Dogs was Hewlett-Packard, which rose 4.4%. Yesterday, in an interview with Bloomberg TV, activist investor Carl Icahn said that at some point a merger of HP and Dell might make sense. While acknowledging that the PC is struggling, Icahn said: "We believe the PC business is still extremely attractive for the short-term because it's necessary. PCs are not going away. Microsoft depends on Dells and Hewlett-Packards."
While it's interesting to consider, a merger of the two wouldn't happen for quite some time, and HP's management team would probably opposed it. HP has seen the effects of a large merger before in its disastrous merger with Compaq, so we can only hope the company isn't tempted to make the same mistake twice.
