It's been a good year for stocks that make up the Dow Jones
Industrial Average, as 28 of the 30 components have risen in
as the only laggards).
And it's been an
even better year for the Dogs of the Dow
. These are the 10 stocks that had the highest dividend yields
when the year began, and this group has gained 25.5% in 2013
against a 24% gain for the broader index, according to
To be sure, that is not a significant level of outperformance.
History has shown that this approach works best in so-so markets,
and is not primed for relatively better gains when then market
slumps badly or soars sharply. Considering the market has fared
very well in 2013, 2014 gains may be much more muted, and if so,
the Dow of the Dogs approach may again lead to sharp
Why Hated Is Good
The appeal of this approach is self-evident. High dividend yields
are a sign that a company is out of favor. And it's a lot easier
for a stock that has no supporters to win new converts than it is
for a stock that is already much-loved by the crowd.
for example. By the end of 2012, this stock was so despised that
it entered into the group of Dow Dogs for the first time ever.
Even though Hewlett-Packard
remains quite troubled
, investors stopped expecting even deeper misery, which has paved
the way for a 95% gain thus far in 2013.
Using this "out of favor" approach, you could single out IBM
and Caterpillar as the best rebound candidates in the Dow for
2014, though that's too simplistic. IBM's troubles run too deep,
as I noted in a recent column
. In contrast, Caterpillar still faces much better days ahead.
The company's exposure to mining and construction is a big drag
right now, but should be a deep virtue in the years ahead.
At year's end, it's helpful to look at the Dow Dogs for the
year ahead, to get a sense of which stocks have been out of
favor, and or simply which Dow components sport the juiciest
dividends right now.
The first item that jumps out at you is just how tough it is
for major corporations to boost sales these days. Only
is poised for sales growth above 5% this year. This is the first
time that Microsoft and
Cisco Systems (Nasdaq:
have ever been Dow Dogs, though that's partly attributable to
robust dividend growth at these firms. Indeed, it's these two
firms, along with chip giant
, that have the cash-rich balance sheets to fuel further robust
Yet there is another stat of these Dow Dogs that also deserves
mention. Great yields aren't what they used to be. Note that
make this list with dividend yields of just 3%. A year ago,
Chevron was in the tenth slot with a 3.5% yield, and you have to
go back to 2007 to find the last time any Dow Dog yielded less
than 3% (
JPMorgan Chase (NYSE:
had a 2.7% yield at the end of that year).
The key takeaway: Robust dividend growth has been more than
offset by rising stock prices. Trouble is, for many companies,
dividend growth appears to be cooling.
As I noted a few weeks ago
, "the outlook for dividend growth in the S&P 500 is
likely to be much more muted in coming years, with earnings per
) growth -- not rapidly rising payout ratios -- becoming the
prime determinant." So let's look at the group of 2014 Dow Dogs
again, this time in the context of projected 2014 profit
Using EPS growth as a proxy for dividend growth, then both
hold great appeal, though I'd choose Verizon over AT&T,
thanks to its superior execution in the wireless services
industry. Indeed, short sellers continue to aggressively target
AT&T with the short position now standing above 130 million
shares, which makes it the second most heavily shorted stock on
the New York Stock Exchange. That's far above the levels of short
I noted just a few months ago
Another reason to be dubious of both Verizon and AT&T:
Their payout ratios are out of whack. According to Thomson
Reuters, each of these firms has doled out more funds in
dividends over the past 12 months than the cash flow to support
Payout ratios also explain why it's the cash-rich tech stocks
you need to strongly consider for the year ahead. Cisco,
Microsoft and Intel have so much cash, and generate such high
levels of free cash flow, that they are positioned to boost their
payout ratios much higher (or boost share buybacks which are
Although Microsoft is posting better operating fundamentals
right now, I actually prefer Cisco Systems among this group,
thanks to its industry-leading positioning in so many areas that
will eventually lead to solid top and bottom-line growth. Cisco
has been a very frustrating stock for its supporters (myself
included), but it's hard to ignore the fact that the balance
sheet is bulletproof, profit margins remain solid, and
management's long-term track record is outstanding.
Risks to Consider:
Compared to a year ago, the dividend yields on the Dow Dogs
are noticeably lower, and rising interest rates could make their
yields comparatively less appealing.
Action to Take -->
Not all Dow Dogs are equally appealing. The tech giants, with
their low payout ratios and high cash balances, are the only ones
capable of solidly growing yields.