It's a new year, so once again it's time to take "Dogs of the Dow" out for a run.
It’s a new year, so once again it’s time to take “Dogs of the Dow” out for a run.
This annual Wall Street strategy has investors kick off January by buying the 10 highest-yielding stocks in the Dow Jones industrial average and hold them for rest of the year.
Yield is the annual dividend from a company divided by its stock price. The higher yields of the “Dogs” signal that their stock prices have declined the most among the Dow’s 30 blue-chip companies.
The goal of the strategy is to earn more dividend income and hope that the stocks also mount a comeback.
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If a company’s stock price is $1 and it pays a dividend of 5 cents to shareholders, the yield is 5 percent. Yields are attractive to some investors because companies will rarely cut their dividend payout to shareholders, except under extreme circumstances.
This year’s “Dogs” are a lot like the ones from 2013.
In the top spot is AT&T, which has a dividend yield of around 5.2 percent, followed by Verizon Communications, which has a yield of 4.3 percent. Both Verizon and AT&T held the number one and two spots, respectively, going into 2013 last January.
Rounding out the top 10 “Dogs of the Dow” are Merck, Intel, Pfizer, McDonald’s, Chevron, General Electric, Cisco and Microsoft. Collectively, 2014’s “Dogs” have a dividend yield of around 4 percent.
As a strategy, the “Dogs” has been relatively consistent, but the amount of the consistency has varied.
The “Dogs” did outperform the rest of the blue chips in 2013. A portfolio of the 10 “Dogs” last year would have risen roughly 33 percent, before dividends, versus the 26.5 percent increase for the entire index.
But last year’s performance was distorted by one stock: Hewlett-Packard. In many ways, HP was the dog of all “Dogs.” After the stock had fallen for three-straight years, it jumped 96 percent in 2013, making the best-performing “Dog” of 2013. In September, it was pulled from the Dow, but HP was still considered a Dow “Dog” because it was in the index on Jan. 1. Without HP’s gains, the “Dogs” would have slightly underperformed the Dow.
The “Dogs” strategy worked in 2012 and 2011 as well, according to research firm Bespoke Investment Group.