The Dogs Dug In Their Heels During a Rough Month
May proved to be a month that most investors were glad to put behind them. Among the major indexes, the Dow 30 Industrial Average ended the period down 6.2%, the S&P 500 was off 6.3%, and the NASDAQ fell 7.1%. However, investors who held an equally weighted portfolio in the highest yielding Dow stocks from the beginning of 2012 (the “Dogs”) came out a little less bruised, shedding only 3.5% for the period.
Leading the charge on the plus side were those two telecom stalwarts, AT&T (T - Free AT&T Stock Report) and Verizon (VZ - Free Verizon Stock Report), with gains of 3.8% and 3.1% for the month, respectively. The solid showing should come as little surprise, considering that both stocks are mainstays in many a conservative portfolio due to their steady performance (each sports our highest score, 100 out of 100, for Stock Price Stability) and their dividend yields (each north of 5%) are well above the Value Line Median.
In AT&T’s case, first-quarter earnings came in ahead of Wall Street expectations, thanks to solid wireless margins and sizable activity on the stock-buyback front.(The company repurchased 67.7 million shares during the March interim for $2.1 billion.) For the year-to-date through May, the shares were up 13%
Over in the Verizon camp, March-quarter share net was up 16% versus the prior year period. A large part of this was fueled by the wireless side of the business, particularly with its customers consuming more bandwidth with their various mobile devices. Data revenues were up 21.1% in the period. Shares of Verizon stock were up 3.8% for the year through May
The rest of the Dogs all fell into the negative column for the month, with the sharpest declines coming from DuPont (DD - Free DuPont Stock Report) which was down 9.7%, and Intel (INTC - Free Intel Stock Report) which lost 9% of its market value in May. Although DuPont posted solid results in the first quarter (share net was up 5.9%, on a sales increase of over 12%), as a diversified manufacturer of chemicals, the company would be vulnerable to a global economic downturn. While conditions in the U.S. and China remain comparatively decent, several countries in Europe have officially slipped into recession, and the Continent’s fiscal and economic woes have yet to show signs of abating. The same also applies to Intel, where, despite a solid quarter, traders are sensitive to the fact that the chip markets, and thus the company’s prospects, are highly dependent on the health of the global economy. On the plus side, the stocks were up 5.4% and 6.6%, respectively, for the year through May.
Catching Up With the Rest of the Pack
Thanks to the comparative outperformance for the month, the Dogs have continued to make up the gap with the rest of the Dow. At the end of the first quarter, the group’s 5.2% gain was trailing an equally weighted investment in the Dow 30 by six full percentage points. But by the end of May the gap had narrowed to less than a percentage point.
As we’ve noted in the past, the Dogs of the Dow strategy tends to be somewhat defensive by nature. In addition to strictly limiting stock selection to the “Bluest of the Blue” chips, it focuses on those Dow components that have temporarily been beaten down (hence the high yields). As such, this system tends to perform comparatively well during flat or down markets. Thus, should equities in general continue to encounter turbulence as the year progresses, we would expect the Dogs to gain further ground.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.