5-Year Dividend Growth Analysis of the 2011 Dow Dogs

by: Zvi Bar
Many investors have been craving higher yielding investments lately. The interest rate most banks now offer for cash and CDs is nearly nothing, and getting lower all the time. Additionally, short and intermediate term U.S. Treasuries aren’t much better, according to the Department of the Treasury’s daily yield curve rates.
Worse yet, U.S. debt is facing downgrade fears. As a result, many investors are avoiding the bond markets and the potential depreciation there-- should we finally enter a higher rate environment-- and looking for stable large-cap equities that can fill the fixed income portion of their portfolio.
There are literally thousands dividend paying equities and funds (of the mutual, closed-end and exchange traded varietals). At least a few must be terrible investments (such as those funds that have fees at or around their yield), and do keep in mind that dividends get taxed-- so it isn’t necessarily the best use of corporate income that has already been taxed at the corporate level. Nonetheless, several of the oldest, most well-recognized and respected organizations are paying sizable dividends.

The S&P 500 (NYSEARCA:SPY) average dividend is currently approximately 1.93%, while the Dow Jones Industrial Average (NYSEARCA:DIA) is yielding about 2.44%. You would have to go to at least a 5-year Treasury note to obtain that kind of yield. Still-- and especially if obtaining some immediate income is important to you-- a very popular option is to invest in the dogs of the dow.

The dogs of the dow theory presumes that investing in the 10 Dow Industrial components that enter a calendar year with the highest yields is a prudent long-term investing strategy. The theorists note that these components should all be relatively strong companies, and that their high yields indicate that they should produce above-average income and also possibly appreciate to a higher price that reflects its above-average yield.

Another great thing about the dogs of dow theory is that the companies are usually familiar to American consumers, and they will find it easy to obtain news and information on them. Further, the companies are highly liquid, and investors probably do not have to fear being unable to sell their shares at a fair market price. You may also find that the 10 combine to make a reasonably diverse, yet conservative portfolio, with a strong domestic, international and emerging market profile, though any year's dogs will not be a perfectly diverse or complete portfolio.

The following are the 10 DJIA components that started 2011 as dogs, their starting & current yields, and 5-year dividend growth analysis of each equity:

1. AT&T (NYSE:T)

  • Start of '11 Yield: 5.85%
  • Current Yield: 5.6%

2. Verizon (NYSE:VZ)

  • Start of '11 Yield: 5.46%
  • Current Yield: 5.3%

3. Pfizer (NYSE:PFE)

  • Start of '11 Yield: 4.57%
  • Current Yield: 4%

4. Merck (NYSE:MRK)

  • Start of '11 Yield: 4.22%
  • Current Yield: 4.3%

5. Kraft (KFT)

  • Start of '11 Yield: 3.68%
  • Current Yield: 3.3%

6. Johnson & Johnson (NYSE:JNJ)

  • Start of '11 Yield: 3.49%
  • Current Yield: 3.4%

7. Intel (NASDAQ:INTC)

  • Start of '11 Yield: 3.42%
  • Current Yield: 3.2%

8. Dupont (NYSE:DD)

  • Start of '11 Yield: 3.29%
  • Current Yield: 3%

9. McDonald's (NYSE:MCD)

  • Start of '11 Yield: 3.18%
  • Current Yield: 2.9%

10. Chevron (NYSE:CVX)

  • Start of '11 Yield: 3.16%
  • Current Yield: 3%

Most have grown their dividends over the last 5 years. The only one to reduce its dividend was PFE, though it has since begun raising it. The present yield is still about 50% below its peak in 2008.

Both Dupont and Kraft have not instituted dividend increases through the last few years, largely because they needed the excess capital to pay for acquisitions, and many expect these companies to again grow their dividends in the coming quarters. Merck is the only 2011 dog that has an unchanged dividend for the last 5 years. It is also the only of the ten dogs for 2011 that has not appreciated from the start of the 2011 through today (down about 1%).

As substitute or compliment to the fixed income portion of a portfolio, allocating into these 10 stocks would provide a yield near the 30-year U.S. Treasury rate, with a strong history of dividend growth and price appreciation. WIthin 2011, this group has appreciated approximately 9%, not counting dividends.

Disclaimer: This article should not be construed as personalized investment advice as it does not take into account your specific situation or objectives.

Disclosure: I am long KFT.