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A June Advance Helps The Dogs Maintain Their Lead

Stock markets around the world did not react positively to the Fed’s signaling that it may begin winding down its bond-buying program later in the year. (As a refresher, the Federal Reserve’s purchases help support bond prices, which, in turn, keeps bond yields low. Low bond yields make stocks a more attractive investment and vice versa.) As a result, an equally weighted investment in all 30 Dow Jones Industrials would have shed 0.9% of their market value in June.

By comparison, the Dogs (the 10 Dow stocks which started the year with the highest yields) were up 0.6%, largely thanks to shares of Verizon (VZ - Free Verizon Stock Report) which climbed 3.8%, Pfizer (PFE - Free Pfizer Stock Report, 2.9%), McDonald’s (MCD - Free McDonald's Stock Report, 2.5%), and Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report, up 2.0%). It’s also worth pointing out that the “non-Dogs”, i.e., the other 20 Dow stocks, were off by 1.6% for the period.

The favorable showing in June stopped a two-month slide in the Dogs’ performance relative to the Dow. However, they did lose ground for the quarter, advancing 2.8% versus a 4.0% gain for the Dow Industrials as a whole. More importantly, though, their year-to-date performance has been quite impressive, with a gain of 20.0% for the first half, compared to 16.5% for the Dow 30. Also, the Dogs have maintained their lead throughout each month, so far.

Big Numbers From The Computer Giant

Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report) also came in on the plus side for June (up 1.6%), but the real attention grabber is the 74.0% advance in the shares since the year began. The company is calling fiscal 2013 (which ends October 31) its “fix-and-repair” year, and on this front, it continues to make quite a bit of headway. Costs are down, operating cash flow is up, long-term debt will likely be trimmed by about $3 billion this year, and the share count will probably be reduced by 40 million. And there are more cost savings on the way. For example, the company’s restructuring initiative calls for another workforce reduction of 7,200 employees by yearend. While H-P is not out of the woods just yet, the positive traction it has displayed thus far has lifted investor spirits and the stock’s price. But even with the impressive advance, the issue is still trading at about half what it was at its peak in 2010.

Other Notable Canines

While HPQ remains the top Dog, the rest of the pack isn’t exactly lacking. Indeed, even when we exclude Hewlett-Packard’s performance, the average Dog stock was up a very solid 14% at the midpoint. Historically speaking, that’s about double the annual advance that stocks have averaged over the last century.

Giving credit where it’s due, we note that Johnson & Johnson was up a fine 22.5% through the first two quarters. The maker of pharmaceuticals, medical devices, and consumer goods is having a good year, with a big boost coming from last year’s acquisition of Synthes, a Switzerland-based medical device manufacturer with nearly $4 billion in annual sales. Earnings remain on track to rise 5%-10% in 2013, and the company recently bumped up its quarterly dividend payout by 8%, to $0.66 a share.

Not too far behind JNJ was Intel (INTC - Free Intel Stock Report), with a gain of 17.5%. Investors appear to have responded favorably to the election of a new CEO after its former chief retired early. The macroeconomic backdrop remains challenging for the chip maker, particularly with spotty global economic conditions and PC sales on the wane. But the company is navigating the choppy waters relatively well, and we look for earnings to regain some lost ground next year.

Next in line we have chemicals manufacturer DuPont (DD - Free DuPont Stock Report), which was up 16.7% for the period, and telecommunications giant Verizon with a gain of 16.3%. DuPont remains on track to generate solid results in the rest of the year, particularly with strong demand for corn seed and crop protection products in the Americas. Notably, last year’s drought in the U.S. left corn inventories at their lowest level in decades and it could take a year or two to replenish that stock. We’re looking for the company’s earnings to be up about 15% this year, and the board recently upped the quarterly dividend by 5%. Meanwhile, Verizon is benefitting from improved revenues across all strategic growth sectors, while cost-containment efforts are leading to wider margins. Altogether, we look for the company to trim another $2 billion from its wireless cost structure this year, while earnings are on track to advance an estimated 20%.

Conclusion

Altogether, the first half was a solid one for equity investors, and even more so for those following the Dogs of the Dow strategy. Looking ahead to the remainder of the year, it now appears that the Federal Reserve will be in no particular rush to stop its quantitative easing campaign after all. This should at least serve to maintain the yield advantage many equities (particularly, the Dogs) have over fixed-income investments. However, with the major indexes (namely the Dow Jones Industrials and the S&P 500) currently hovering near their all-time highs, a repeat performance of the first-half’s advances may be a bit much to ask for. But we believe the economic outlook looks favorable enough for stocks to hold onto their gains during the months ahead.

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