A Quarterly Review Of The Dogs Of The Dow Strategy

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Includes: BA, CAT, CSCO, CVX, IBM, INTC, JNJ, PG, WMT, XOM
by: Tom Au, CFA

Summary

The ten highest yielding stocks, called the "Dogs of the Dow," are beating the overall index so far this year.

Only one Dog fell in price since December 31, 2015, versus eight out of twenty non-dogs.

Relatively high turnover is making the strategy work.

It's not surprising that the "Dogs" strategy is working in today's flattish, bond-like market, where yield is a major tie-breaker.

In an article early in January we opined that the recent relatively high turnover in "Dogs of the Dow" stocks suggested that the strategy of selecting the ten highest yielding stocks, would outperform the whole index this year. Out to April 1, 2016, the Dogs did just that. As of that date, the ten dogs were up 7.0% versus 2.3% for the whole index.

We selected only seven of the ten Dog stocks, substituting an "eighth" Johnson & Johnson (NYSE:JNJ) for the three "perennials," we threw out; Verizon (NYSE:VZ), Merck (NYSE:MRK), and Pfizer (NYSE:PFE). This was a fortuitous substitution, because Johnson and Johnson outperformed Merck and Pfizer (the latter was the dogs' sole loser), even while underperforming Verizon.

Two stocks have already graduated from the list in a little over three months; one was Walmart (NYSE:WMT), whose sharp price rise lowered the yield to the point where it no longer qualified. The other was Procter & Gamble (NYSE:PG) which barely fell off the list. Their replacements were Boeing (NYSE:BA) and Intel (NASDAQ:INTC) which suffered large capital losses, and corresponding gains in the dividend yields that made them dog stocks. But these last two issues contributed to the outperformance of the dogs by pulling down the "rest of the Dow" in the first quarter.

Eight non-dog stocks were losers. Besides Boeing and Intel mentioned above, other decliners include JPMorgan Chase (NYSE:JPM), and DuPont (NYSE:DD). We identified the latter in the January piece as being overpriced (specifically as being "temporarily" a non-dog), and still believe that to be the case. We find it striking that the four remaining losers were drawn from the five lowest yielding stocks. They are: American Express (NYSE:AXP), Disney (NYSE:DIS), Goldman Sachs (NYSE:GS), and Nike (NYSE:NKE), with the fifth, Visa (NYSE:V), barely in positive territory.

Chevron (NYSE:CVX) went on a tear recently, after replacing Verizon as the highest yielding Dog stock. International Business Machines (NYSE:IBM) has fallen five notches on the list, and given its recent momentum, appears to be the next likely graduate from the Dogs. It has been replaced in the middle of the dogs list by fellow tech stock, Cisco Systems (NASDAQ:CSCO), which got there the "right" way; its price has actually risen during the course of the year, just at a slower rate than its 24% recent dividend increase. Although the company won't raise its dividend by 20% or more every year, just the fact that the dividend is rising at a double digit rate, off a base of over 3.5%, ought to be of interest to dividend growth investors.

Going forward, we would admit the new Dogs, Boeing and Intel,while retaining Walmart and Procter & Gamble, bringing our total up to ten. (That would be in addition to Caterpillar (NYSE:CAT) Chevron, Cisco Systems, Exxon Mobil (NYSE:XOM), International Business Machines, and Johnson & Johnson from the original list.) In effect, we've substituted these two former non-dogs, as of April 1, 2016, in addition to Johnson & Johnson, as of December, 31, 2015, for the three we "threw out" at the end of last year.

In a sense, it is not surprising that the high-yielding Dogs are outperforming in a flat, "bond-like" market like that of 2016, where yield is a major "tiebreaker" to performance. The kinds of markets that the dogs strategy doesn't do well in are exuberant markets like those of the turn of the century, where one should be buying "optionality" and sacrificing yield. But that's not today's market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.