Score one for the "Dogs." A look at the 2012 performance of the
"Dogs of the Dow ," which are the 10 stocks in theDow Jones
Industrial Average (DJIA) with the highestdividend yield , now
reveals an impressive run. In theory, these high yielders have been
oversold (as the share price falls, the dividend yield goes up) and
are most likely to outperform the rest of the stocks in the Dow in
the next 12 months.
As a group, these 10 stocks rose an impressive 8.3% so far this
year, which is five full percentage points ahead of the broader Dow
Jones Industrial Average. In fact, toss out these 10 "Dogs," and
the rest of the DJIA's 20 stocks are on track to finish the year
flat.
Another plus: Add in these Dogs' solid dividend yields (which
ranged from 3 to 6%), and the entire group has delivered
double-digit gains in terms of total return thus far in 2012. Hats
off to
Merck (
MRK
)
,
AT&T (
T
)
,
GE (
GE
)
and
Kraft Foods Group (Nasdaq: KRFT)
, for delivering total returns exceeding 20% in the same period.
(Note that Kraft was split into Kraft Foods Group and
Mondelez International (Nasdaq: MDLZ)
earlier this year, and the returns represent continued stakes in
each firm).
A Solid Year for the Dow's Dogs
.PNG)
Why did these stocks fare so well in 2012? Because investors
continue to gravitate toward income-producing stocks, especially
whilefixed-income investments such asbonds and certificate of
deposits areoffering such paltry yields of 2%.
Taken a step further, the top five stocks in this group have
returned nearly 19% in 2012 (whencapital appreciation and dividend
yields are included), which is quite remarkable at a time when the
major averages are drifting back toward breakeven for the year.
What about 2013?
The question for investors is whether this approach can beat
themarket again in 2013. Before answering that, let's look at the
current crop of Dow Dogs (though this group may change a bit before
now and year's end).
The coming Dow Dogs portfolio
.PNG)
Of course, to make this group, you often have to be out of
favor. For example,
McDonald's (
MCD
)
,
Hewlett-Packard (
HPQ
)
and
Chevron (CVX)
weren't on this list a year ago, though their negative returns thus
far in 2012 have pushed up their yields. Conversely, a strong year
for companies such as GE means they're not welcome in this club for
2013.
And this is exactly what highlights the unusual approach for
thisinvestment strategy. The Dogs of the Dow basket of stocks can
pay off if underperformers start to claw back and deliver gains in
the year ahead.
If you look at it another way, these stocks can post robust
gains if investors perceive them as solid "dividend growers." In
recent years, there's been a clear interest in stocks that tend to
support steadily rising payouts. So how does this coming crop of
Dow Dogs fare when it comes to dividend growth? Here's what their
average annual dividend growth rate has been during the past four
years...
McDonald's has managed to deliver very impressive dividend hikes
in recent years, but the fastest-growing dividends are mostly
coming from the high-tech field.
Intel (Nasdaq: INTC)
and Hewlett-Packard have boosted the payout at a roughly 15% annual
clip, while companies like
Microsoft (Nasdaq: MSFT)
,
Cisco Systems (Nasdaq: CSCO)
and
Apple (Nasdaq: AAPL)
are becoming dividend stars as well.
So perhaps we should suggest a new twist on the Dogs of the Dow
Theory: Focus on the components in the Dow that sport the highest
yields and the fastest-growing dividends. The five companies in
this group are: Intel, Hewlett-Packard, McDonalds,
Johnson & Johnson (JNJ)
and
Chevron (CVX)
.
Risks to Consider:
The Dogs of the Dow approach has been a solid one in 2012, but
this group has also underperformed the rest of the pack in certain
years. Yet over the long haul, it has tended to deliver superior
returns.
Action to Take -->
We've got six more weeks to see how this race finishes, but the
Dogs of the Dow's five-percentage-point lead appears undefeatable
at this point. Toss in the income they've produced, and the total
return has been especially notable. The appeal of this approach is
that even if these stocks don't outperform, their high dividend
yields should keep them from tanking in a tough market, especially
since their payout still exceeds most other fixed-income
investments.