The “Dogs of the Dow” is the name of one of the simplest dividend strategies for beating the market. Over the coming year, I’ll track the Dogs’ performance and keep you abreast of news affecting these companies.
The strategy
The Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI). The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would get not only large dividends but also gains in the stocks underlying those dividends.
High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:
Many people fear that increasing dividend yields mean lower portfolio returns.
Others believe that dividend payments mean that management believes the business is done growing.
Evidence compiled by Tweedy, Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.
Performance
After beating the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI) by 6.8% in 2011, the Dogs underperformed the Dow by 0.2% in 2012.
Check out the Dogs’ performance in 2013 so far:
| Company | Initial Yield | Initial Price | YTD Performance |
|---|---|---|---|
| AT&T | 5.34% | $33.71 | 15.02% |
| Verizon | 4.76% | $43.27 | 22.17% |
| Intel (NASDAQ:INTC) | 4.36% | $20.62 | 10.00% |
| Merck | 4.20% | $40.94 | 17.11% |
| Pfizer | 3.83% | $25.08 | 24.94% |
| DuPont | 3.82% | $44.98 | 10.34% |
| Hewlett-Packard (NYSE:HPQ) | 3.72% | $14.25 | 38.14% |
| General Electric (NYSE:GE) | 3.62% | $20.99 | 4.47% |
| McDonald’s | 3.49% | $88.21 | 14.19% |
| Johnson & Johnson | 3.48% | $70.10 | 21.50% |
| Dow Jones Industrial Average | 13,104 | 11.01% | |
| Dogs of the Dow | 17.79% | ||
| Dogs Return vs. Dow (Percentage Points) | +6.78% |
Source: S&P Capital IQ as of April 20.
This week, the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI) was down 2.14%. The Dogs fell less than the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI), bringing the Dogs’ outperformance up to 6.78 percentage points better than the Dow.
The big news affecting the Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI) this week a slowdown in growth in China as well as multiple companies’ earnings reports. On Monday, China reported GDP growth of just 7.7%, down from last quarter’s 7.9% growth and below economists’ expectations of 8% growth. The report led to a broad sell-off in commodities and cyclical stocks. The other story was that 11 of the 30 Dow Jones Industrial Average 2 Minute (INDEXDJX:.DJI) stocks reported earnings this week, and across the board they were largely disappointing.
