Last year in January 2012, I wrote an article on a strategy I created to pick stocks of the Dow in hopes of outperforming the Dow (DIA), as well as the popular "Dogs of the Dow" Strategy. This article is a review of the performance of the stock picks from the article as well as my 2013 Dow stock picks. Last year I had back tested my strategy for the previous five years, and found that every year my strategy outperformed, so I was anxious to see how my strategy would fare during 2012.
For my strategy, I chose to use the main criteria of dividend growth and stability for all 30 stocks of the Dow. Then as a secondary set of criteria to refine that list, I used two simple technical indicators, a moving average and momentum. My method is different because it employs both fundamental and technical analysis, compared to instead of just using the dividend yield like the Dogs of the Dow, or owning the whole Dow Jones Industrial Average in an ETF, the SPDR Dow Jones Industrial Average. The technical data I used is from the TD Ameritrade Strategy Desk, but also can be found many other charting websites. The Company profiles, PE and dividend yield are from Yahoo Finance. The following are my criteria and indicators used in my strategy:
Dividend Stability and Growth Criteria
To get my initial list of Dow stocks for each calendar year I only included stocks that had stable dividends and or growing dividends over the previous 4 quarters from the end of each year, and excluded any companies that have cut their dividends. I used Yahoo Finance to retrieve the historical dividend amounts for all 30 Dow components.
- The chart Scale I used was Weekly.
- All positions are an equal weight of the portfolio.
- Condition 1: The weekly close at the end of the year is less than the 10 period simple moving average.
- Condition 2: The stock must have a 52 period momentum value that is positive.
- Condition 3: Out of the stocks that meet the first two conditions, select the stocks with the three highest 52 period momentum values.
- In the case where not at least three stocks that meet both condition 1 and condition 2, as was the case for the 2009 selection and for this year, use condition 1 and condition 3, and exclude condition 2.
In the following table are the average returns of the stocks selected by the strategy for 2012 compared to the Dow Jones Industrial Average ETF, and the average total return for the Dogs of the Dow stocks. For my calculations, I wanted to make sure dividends were included and reinvested, so I used the DRIP returns calculator on DividendChannel.com to get my final total return.
For 2012, using my above dividend criteria, and technical criteria, the following stocks met the conditions: International Business Machines (IBM), American Express Company Common (AXP), Cisco Systems, Inc. (CSCO). In the table below, the data shows that the average return for the three above stocks outperformed both the Dow and the Dogs of the Dow again in 2012, making it the sixth consecutive year of outperformance of my strategy.
2012 Total Return
Dog's of Dow
While my strategy did outperform again this year, the outperformance was not as big as previous years. For the previous 5 years 2011-2007 the average outperformance of my strategy over the Dow was 11.43%, and also outperformed the Dogs of the Dow by an average of 11.14%, and is shown in the table right below. This year my strategy outperformed the Dow by 2.75%, and the Dogs of the Dow by Only 1.25%, I believe the reason for the outperformance being less than previous years was investors chasing yield. The DIA has a current yield of 3.79%, and all the Dogs of the Dow have a higher dividend yield than my three picks from 2012, so investors I believe pushed prices of higher dividend yielding equities as compared to previous years.
Mine Vs DOW
Mine Vs DOD
2013 Strategy Picks
I am looking forward to seeing if my strategy will outperform once again in 2013. Onto my 2013 Dow stock picks for the upcoming year. Using the same criteria as I used last year, nine stocks met those criteria, and the three with the largest momentum on December 31st 2012 were:
The Home Depot, Inc. (HD)
The Home Depot, Inc., together with its subsidiaries, operates as a home improvement retailer. The company's stores sell building materials, and home improvement and lawn and garden products to do-it-yourself, do-it-for-me (at D-I-F-M), and professional customers. It also offers installation services for D-I-F-M customers. Home Depot has a PE ratio of 22.38, and a dividend yield of 1.90%. (Yahoo Finance)
Wal-Mart Stores Inc. (WMT)
Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam's Clubs, and neighborhood markets, as well as walmart.com; and samsclub.com. Wal-Mart has a PE ratio of 14.18, and a dividend yield of 2.30%. (Yahoo Finance)
Verizon Communications Inc. (VZ)
Verizon Communications Inc. provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. Its Verizon Wireless segment offers data services and applications comprising Internet access through smart phones and basic phones; mobile broadband services; messaging services, which enable its customers to send and receive text, picture, and video messages; customer-focused and business-focused offerings; location-based services; and global data services, as well as access to data applications and services of third parties. Verizon Communication has a PE ratio of 40.69, and a dividend yield of 4.80%. (Yahoo Finance)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.