Dividend Fight! It's Cats Vs. Dogs

Includes: SPY, VIG
by: Dale Roberts

In this article, I looked at the holdings of Vanguard's Dividend Appreciation fund (NYSEARCA:VIG), and specifically the top ten holdings of VIG. And being as, in my weaker moments, I go by the alias of The Scaredy Cat Investor, I nicknamed the VIG top ten the Scaredy Cat Vanguard Dividend Appreciation Portfolio - SCVIG.

No flea infested pretenders in this portfolio; the companies will have to have increased their dividend 10 years running. And the SCVIG then grabs the ten largest companies in VIG. This large cap bias has led to an incredible outperform against the market. The Cats mauled the market. So what happens when the Cats go toe to toe, er make that paw to paw with those big ugly Dividend Dogs known as the Dogs of the Dow?

I'll have to admit, I'm more of a dog guy when it comes to the four-legged (not portfolio) variety of pet names. But sometimes dogs just ain't too bright. My lovable Husky Retriever - I call him a Retrievesky when people ask (I then wait for the laugh or smile that doesn't usually arrive) is big and strong, but sometimes he's not the smartest doggy snack in the cupboard.

(Click to enlarge)

Especially when it comes to Cats. On more than one occasion Sampson has approached a neighbourhood Cat who will wait calmly, let him approach, and then give him a good open clawed swat. And yet lovable Sampson keeps trying to make friends.

I'm thinking maybe that's the case with the Dogs of the Dow. Possibly not the smartest dividend model on the block. To become a Dog, all you need is cash, lots of cash. The Dogs of the Dow are the highest paying dividend stocks in the Dow Jones Industrial Average. A record of dividend increases, payout ratio, any measure of quality, earnings, cash flow - not important. Just pay the man at the door (shareholders) and you're in to this exclusive kennel.

If you're as lazy as a Bassett Hound and don't want to buy the 10 companies and rebalance every year, the Dogs are available in an ETF (NYSEARCA:DOD) for Dogs of the Dow from Elements. You can also find a site that is all things Dogs at (you guessed it) dogsofthedow.com. There's lots of info on the Dogs and the Small Dogs of the Dow.

Simply select the five Dogs with the lowest stock price and you will have what they call the Small Dogs of the Dow (Sometimes referred to as the Puppies of the Dow or the Flying Five). Then get in touch with your broker and invest an equal dollar amount in each of these 5 high yielding, low priced stocks. Then hold these five "Small Dogs of the Dow" for one year. Investing in the Puppies of the Dow would have resulted in a 20.9% average annual return since 1973! OK, that is impressive.

So what kind of companies does this stock picking formula breed?

  • Here are the Dogs of the Dow for 2006 - General Motors (NYSE:GM), AT&T (NYSE:T), Verizon (NYSE:VZ), Merck (NYSE:MRK), Altria (NYSE:MO), Pfizer (NYSE:PFE), Citigroup (NYSE:C), DuPont (NYSE:DD), JPMorgan Chase (NYSE:JPM), General Electric (NYSE:GE).
  • In 2007 we had Pfizer, Verizon, Altria, AT&T, Citigroup, Merck, General Motors, DuPont, General Electric, JPMorgan Chase. Yes that's the same group as 2006.
  • 2008 had a litter of Citigroup, Pfizer, General Motors, Altria, Verizon, AT&T, DuPont, JPMorgan Chase, GE, Home Depot (NYSE:HD).
  • In 2009 we find Bank of America (NYSE:BAC), General Electric, Pfizer, DuPont, Alcoa (NYSE:AA), AT &T, Verizon, Merck, JPMorgan Chase, Kraft (KRFT).
  • In 2010 the dogs had some real bite with AT&T, Verizon, Pfizer, Merck, Kraft, DuPont, McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Home Depot and Boeing (NYSE:BA).
  • 2011 had AT&T, Verizon, Pfizer, Merck, Kraft, Johnson and Johnson, Intel, DuPont, McDonald's and Chevron.
  • The current Dog show for 2012 features AT&T, Verizon, Merck, GE, Pfizer, DuPont, Johnson and Johnson (NYSE:JNJ), Intel (NASDAQ:INTC), Procter and Gamble and Mondelez (NASDAQ:MDLZ) the foreign spin off of Kraft companies.

By comparison the Cats for 2012 are WalMart (NYSE:WMT), Coca-Cola (NYSE:KO), International Business Machines (NYSE:IBM), Chevron, Pepsico (NYSE:PEP), Procter and Gamble, Exxon Mobil (NYSE:XOM), United Technologies (NYSE:UTX), McDonald's and 3M (NYSE:MMM). The current average yield of the Cats is 2.77%, whereas the Dogs offer a high pitched yield from 3.10 to 5.82%.

As we can see, the Cats and Dogs for 2012 can only agree on Procter and Gamble. Looks like the Cats and Dogs both have a taste for P&G's Lams pet foods. Beyond that one company, the Dogs and Cats do not see eye to eye.

Yet, look at the longer term numbers and we can see that the Dogs do have some bite, at times. No one has done much over the 5-year period; most indexes just struggling to keep up with inflation. But over the 10-year period we can see some decent, at least respectable, returns in line with the markets. But that performance is very inconsistent and choppy compared to the markets. Due to its singled minded high-dividend chasing model, the Dogs can jump around like a bunch of crazy pups at times. Also, the Dogs are rebalanced only at the beginning of each year. If one of those Dogs gets sick, they're staying in the pen for the rest of the calendar year.

Here are the Dogs annual returns for a few periods to the end of 2011.

1 Year 3 Year 5 Year 10 Year 20 Year
16.3% 17.9% 3.4% 6.7% 10.8%

Here now let's get on with our main event. Here are the Doggy digits along with the Cat comparison. For the Dogs and Cats in the year 2006 - they have been calculated from May (the inception day for VIG and the Scaredy Cats).

Investment 2006 2007 2008 2009 2010 2011
Dogs of the Dow 20% 2.2% -38.8% 16.9% 20.5% 16.3%
Small Dogs of the Dow 26% 4.2% -49.1% 19.3% 15.4% 19.2%
Scaredy Cat VIG 14.3% 13.2% -12% 12% 13% 14%
S&P 500 9% 5.5% -37.0% 26.5% 15.1% 2.1%

And to November of 2012 we have a return of 8% for the Cats, and a return of 7% for the Dogs.

From inception the Cats delivered an 78% total return - from May 2006 to November 2012. Those tail and dividend chasing Dogs, they show a 32% total return. It's just not a fair fight. Those Cats sent those Dogs away with their collective tails between their legs. But recently we can see that the Dogs are having their day. I think they may be fair weather Dogs. Whereas the cats performed better during the chaos heading into 2008, and coming out of 2008. That is certainly the dividend raising quality of the Cats vs the dividend chasing of the Dogs at play. These days, it seems many are chasing yield and driving up prices. And of course that's what those Dogs do single-mindedly. They chase yield.

And who knows how long they will continue to have a good run? Eventually, they're going to hit the end of their leash. How many dog years that will take, is anybody's guess.

Ahhh, that was a fun article to write. Cats rule. But now (stretch - yawn) ... it's time for a nap.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Please note that Dale Roberts aka cranky, the crankywriter, is not a licenced investment advisor, and the above opinions should only be factored in to an investor's overall opinion forming process. Consult a licenced investment advisor before making any investment decisions. Please note that Dale Roberts may have exposure to companies listed in this article, through the holding of ETFs.