Last year in January 2013, 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 my article last year, as well as my 2014 Dow stock picks.
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 ETF. The technical data I used is from the TD Ameritrade ThinkorSwim platform, but also can be found on many other charting websites.
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.
1. The chart Scale I used was Weekly.
2. All positions are an equal weight of the portfolio.
3. Condition 1: The weekly close at the end of the year is less than the 10 period simple moving average.
4. Condition 2: The stock must have a 52 period momentum value that is positive.
5. Condition 3: Out of the stocks that meet the first two conditions, select the stocks with the three highest 52 period momentum values.
* Additional Notes: 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 2013 compared to the Dow, and the Dogs of the Dow. 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 2013, using my above dividend criteria and technical criteria, the following stocks met those conditions: Home Depot (HD), Wal-Mart (WMT), and Verizon (VZ). In the table below, the data shows that the average return for the three above stocks using my strategy underperformed both the Dow and the Dogs of the Dow for the first time in seven years worth of data.
2013 Total Return
In the table below, I have compiled the return data for each year of my strategy compared to the Dow & the Dogs of the Dow.
Mine Vs DOW
Mine Vs DOD
I was extremely surprised that my strategy underperformed both the Dow, and the Dogs of the Dow. At the beginning of the year last year, everything was about dividend yield because of the low interest rate environment, and those stocks with large yields had been outperforming in 2012. However, since the beginning of 2013, the economy has started to grow at a faster pace than expected and interest rates have significantly increased this year, which has led to growth stocks being favored over dividend stocks. When the yield on the 10-year treasury at the beginning of last year was under 2%, owning dividend stocks, which paid a 2.5%, or greater yield seemed like a homerun, but as rates have risen dividend stocks, REITs, MLPs, etc. have all underperformed the overall market. The combination of higher growth and rising rates is what I believe caused my overall performance of my picks to underperform. My two picks of Wal-Mart and Verizon perfectly illustrated those factors, and Home Depot was a bright spot because when the economy does well, Home Depot stock tends to perform well.
2014 Strategy Picks
Using the same criteria as I used in previous years, eight stocks met those criteria, and out of those eight stocks, the three with the largest momentum at the end of 2013 were:
Johnson & Johnson (JNJ)
A catalyst for JNJ going forward that could lead to outperformance, is a potential sale of businesses. Within the last couple of weeks, there was a report that Carlyle Group (CG) could potentially acquire the ortho clinical diagnostics division of JNJ for $4 billion. That amount may seem like a large amount but it only represents about 1.5% of the market cap of JNJ, but if JNJ continues to sell or spin-off businesses like Pfizer (PFE) did with Zoetis (ZTS), this could potentially push shares significantly higher.
Procter & Gamble (PG)
A catalyst for PG going forward is the change in CEO that occurred earlier this year. Activist investor Bill Ackman brought on the change in CEO, and the board of directors decided to go back to the old CEO Alan Lafley. With a change in CEO, PG is looking to find ways to increase growth, by cutting costs, and expanding its offering in markets where growth is greater than developed market like emerging markets.
Microsoft Corporation (MSFT)
There is an obvious catalyst for MSFT in the coming year, and that catalyst is the selection of a new CEO who will take over from Steve Ballmer. Since it was announced that Steve Ballmer would step down as CEO, MSFT stock has outperformed both the S&P 500 (SPY), and the Nasdaq (QQQ). If the new CEO choice is viewed positively by the market, I would expect shares to continue to outperform this year. However, if the Microsoft CEO choice is not viewed favorably by the market and the market views the choice as a continuation of Steve Ballmer, the opposite could occur and shares could fall.