Dow Dogs May Provide Income and Appreciation Despite Current Volatility

 |  Includes: CVX, DD, DIA, INTC, JNJ, MCD, MDLZ, MRK, PFE, SPY, T, VZ
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 of dividend paying equities and funds. 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 most dividends and distributions do get taxed. 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 2.07%, while the Dow Jones Industrial Average (NYSEARCA:DIA) is yielding about 2.50%. 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 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 per share. The dogs all entered 2011 with a yield of at least 3%.

The following are the 10 DJIA components that are the 2011 Dogs of the Dow, their current yields and their 2011 to date performance

1. AT&T (NYSE:T)

  • 2011 to-date: -4.73%
  • Current Yield: 5.96%

2. Verizon (NYSE:VZ)

  • 2011 to-date: -2.99%
  • Current Yield:5.69%

3. Pfizer (NYSE:PFE)

  • 2011 to-date: 0.91%
  • Current Yield: 4.55%

4. Merck (NYSE:MRK)

  • 2011 to-date: -13.25%
  • Current Yield: 4.87%

5. Kraft (KFT)

  • 2011 to-date: 6.16%
  • Current Yield: 3.39%

6. Johnson & Johnson (NYSE:JNJ)

  • 2011 to-date: 2.08%
  • Current Yield: 3.67%

7. Intel (NASDAQ:INTC)

  • 2011 to-date: -8.75%
  • Current Yield: 4.08%

8. Dupont (NYSE:DD)

  • 2011 to-date: -12.21%
  • Current Yield: 3.51%

9. McDonald's (NYSE:MCD)

  • 2011 to-date: 13.64%
  • Current Yield: 2.84%

10. Chevron (NYSE:CVX)

  • 2011 to-date: 2.24%
  • Current Yield: 3.34%

Half of these companies' share prices are higher now than they were at the start of 2011, and 80% outperformed the S&P 500 without including dividends. Additionally, most have grown their dividends over the last 5 years.

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.

As a substitute or complement 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.

Disclosure: I am long KFT.