The Dogs Remain Out In Front

By historical standards, this is shaping up to be a banner year for equity investors. Both the Dow Jones Industrials and the S&P 500 are trading near their all-time highs while the NASDAQ has rebounded to its highest point since the tech bubble burst in 2000. The Dogs of the Dow (meaning the 10 highest-yielding Dow components at the start of the year) have done equally well. In fact, a balanced weighting in those 10 stocks performed better than the Dow as a whole for most of 2013. Indeed, after falling slightly behind in September, the group regained its lead the following month, and maintains a slight edge for the year-to-date through mid-November. 

By The Numbers

Through November 15th, an equally-weighted position in the 10 Dog stocks would have been up 27.5%. This compares to a 24.7% gain for the Dow 30 as a whole and a 24.5% advance for the 20 Dow components excluded from the Dogs.

Leading the charge for most of the year is computer-maker Hewlett-Packard (HPQ), which was up 76.9% through mid-November. (For the benefit of new readers, we point out that although HPQ was removed from the Dow 30 at the end of September, we have kept in in the portfolio since the Dogs of the Dow strategy calls for holding the original position for the full year.)

Although HPQ carried most of the weight, it was far from a solo act. Other top Dogs for the year so far include DuPont (DD Free DuPont Stock Report) which was up 38.1%; Johnson & Johnson (JNJ - Free J&J Stock Report), up 34.7%; General Electric (GE - Free GE Stock Report), up 29.6%; and Pfizer (PFE - Free Pfizer Stock Report), up 28.4%.

Top Contenders For 2014’s Dogs

The Dogs of the Dow is a bit of a value strategy, in that it requires taking equal positions in the top 10 highest yielding issues out of the 30 Dow Industrial stocks at the end of the year. Naturally, the list will often include the perennial high-yielding issues, such as the telecom giants AT&T (T - Free AT&T Stock Report) and Verizon (VZ - Free Verizon Stock Report). But every now and again a company will make the list because it has temporarily run into a rough patch. Such was the case in 2012, when Hewlett-Packard shares lost 44.7%. As the company maintained its dividend payout, the lower price lifted the stock’s yield, allowing it to make the list for 2013. The logic behind going with these high-yielding “dogs” is that that these are all solid blue chip issues, and that should one or two names make the list because the companies have fallen upon hard times, a potential turnaround is within reason. This proved to be a classic situation with HPQ this year, as illustrated by its aforementioned performance.

Although 2013 is not quite over yet, it’s not too early for interested investors to start considering next year’s likely Dogs lineup. Of course, there are some that (barring an abrupt reversal of fortune) are virtually shoe-ins. These include the aforementioned AT&T and Verizon, recently yielding about 5.2%, and 4.2%, respectively. They will likely be joined by three other current members of the Dog pack, with Intel (INTC - Free Intel Stock Report), 3.6%; Merck (MRK - Free Merck Stock Report), 3.5%; and McDonald’s (MCD - Free McDonald’s Stock Report), 3.3% rounding out the top five.

The next two spots would probably be filled by two of this year’s relative underperformers, Chevron (CVX - Free Chevron Stock Report), 3.2% and Cisco (CSCO - Free Cisco Stock Report), 3.2%. However, the remaining three positions are too close to call, with the final outcome probably coming down to the wire. For now it’s a four-way battle between Dog incumbents DuPont and Pfizer, and potential new additions Microsoft (MSFT - Free Microsoft Stock Report) and Coca-Cola (KO - Free Coca-Cola Stock Report), all of which were recently yielding right around 3.0%.

Notably, none of the new Dow 30 Industrial components, Nike (NKE - Free Nike Stock Report), Goldman Sachs (GS - Free Goldman Stock Report), and Visa (V - Free Visa Stock Report), added at the end of September made the list, as their yields are currently running at 1.3% or less.

At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.