'Dogs of the World' Should Fetch Some Investor Interest

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 |  Includes: DIA, NOK, ORAN, SAN, TEF
by: Alan Young

One of the most famous stock-picking strategies is probably the simplest: the Dogs of the Dow. Once a year, just check the dividend yields of the 30 stocks of the Dow-Jones Industrial Average, find the 10 highest, and buy equal amounts of each. At the end of the year, repeat, selling the stocks that are no longer among the top 10.

This has worked better, historically, than buying all the Dow stocks, and one can imagine some of the reasons:

  1. Before there were index funds and discount brokers, buying 10 stocks was significantly cheaper than buying 30 stocks.
  2. Large, established companies like those in the Dow index generally keep a steady (or increasing) dividend. So if the yield is higher, it means the stock has gotten cheaper, i.e., is out of favor (hence, “dogs.”) Hypothetically, at least, that suggests it is due to rebound.
  3. Dividend yields contribute to portfolio performance.

That’s the history, but why should the Dow get all the attention? There must be other large-cap stocks with good dividend yields.

First, I screened for stocks with a market cap of at least $20 billion (only one Dow stock is smaller than this) and dividend yields of 6% or more. This got me a list of 20 stocks—a very convenient number to work from. However, there’s a complication: most web sites compute the dividend yield as an annualization of the last dividend. That’s fine when every payment is the same, or nearly so, as is usually the case with Dow-type stocks. But most stocks outside the US base dividends on recent profits or cash flow, with only minimal efforts at consistency. Some companies have a policy of paying the main dividend once a year, with smaller interim dividends at other times. So I thought it essential to look past the most recent dividend payment, and find an average.

That was more work than I wanted to do for 20 stocks, so I picked some of the most promising:

Ticker

Price

Market Cap ($ billions)

Avg. Yield

Div. Period

Dividends

Sector

STD

11.33

100

7.4%

quarterly

0.34, .16, .16, .18

Bank

FTE

21.00

56

9.0%

Semi

1.17, .77, .98, .85

Telecom

OTCPK:KKPNY

14.53

22

7.2%

Semi

.75, .36, .61, .32

Telecom

TEF

23.82

109

7.4%

semi

1.07, .90, .82, .74

Telecom

NOK

6.23

24

9.0%

Annual

.57, .49, .55, .83

Telecom

OTCPK:TLSYY

16.21

41

8.1%

semi

.72, .67, .64, .60

Telecom

OTCQX:EONGY

27.89

163

7.6%

Annual

2.15, 1.90, 2.00

Utilities

Click to enlarge

Since these are all foreign stocks, I would call this method the “Dogs of the World.” And indeed, it’s true that all of them have underperformed the broad market over the last year or two. Will these work better for your portfolio than Dogs of the Dow, or an index fund? (Remember, a holding period of at least a year is needed to see if the system is working).

If you want to research the other candidates from my screen, they include AstraZeneca Group plc (AZN), Banco Bilbao Vizcaya Argentaria, S.A. (NYSE:BBVA), CenturyLink, Inc. (CTL), ENI S.p.A. (E), Kinder Morgan Energy Partners L.P (KMP), Nuveen Arizona Premium Income Municipal Fund (NAZBY), National Grid plc (NGG), Southern Copper Corporation (SCCO), Vodafone Group plc (VOD), and Westpac Banking Corporation (WBK). However, different web sites may report different dividend yields, so you might come up with a different list.

Disclosure: I am long NOK.