Dogs Of The Dow: Dividend And Performance Review

 |  Includes: CVX, DD, INTC, JNJ, MCD, MDLZ, MRK, PFE, 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. 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 (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 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 that reflects its above-average yield.

The following are the 10 DJIA components that started 2011 as dogs, in alphabetical order: AT&T (NYSE:T), Chevron (NYSE:CVX), Dupont (NYSE:DD), Intel (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), Kraft (KFT), McDonald's (NYSE:MCD), Merck (NYSE:MRK), Pfizer (NYSE:PFE) and Verizon (NYSE:VZ). I have provided their 2011-to-date performance, current dividend yield and dividend growth rates for 1-year & 5-year periods for each equity:

Please note that five years ago MCD paid an annual dividend of $1.00, and that the 5-year quarterly dividend growth rate for MCD was calculated as though it paid that dollar in 25-cent quarterly dividends.

One may also find that the 10 combine to make a reasonably diverse, yet conservative portfolio, with a strong domestic, international and emerging market profile. Any year's dogs will not be a perfectly diverse or complete portfolio. For example, the 2011 list is absent any financials, though the 2012 dogs may have one or more.

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., whatever that may be.

As substitute or complement to the fixed income portion of a portfolio, allocating into these 10 stocks would provide a yield above the 30-year U.S. Treasury rate, with a strong history of growing yield.

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.