A Strong April for The Dogs of the Dow

The Dogs of the Dow were well behaved in April. In fact, relative to the rest of the Industrial Average, they had their best month of the year. This group, which is made up of the 10 highest yielding Dow stocks as of the start of 2015, outperformed the non-Dogs by more than 300 basis points. In all, the Dogs increased 3.5% for April, while the other 20 stocks in the blue chip index inched ahead just 0.2%. (Note that these results are based on an equal weighting of each of the Dow components. Moreover, although Apple (AAPL Free Apple Stock Report) has replaced AT&T (T) in the DJIA, all results and comparisons for this year include only the original 30 components.)

Overall, the Dow Jones Industrial Average has alternated winning months with losing ones so far in 2015. The Dogs have followed this pattern, as well, with the April advance putting the group back in the black and ahead for the year. In all, the Dogs were up 1.9% after four months, while the non-Dogs were still showing a slight loss of 0.3%.

Leading the Way

Among the Dogs, the April gains were fairly broadly based. Eight of the ten issues showed an increase in share price, though the gain at beverage giant Coca-Cola (KO - Free Coca-Cola Stock Report) amounted to all of a penny. General Electric (GE Free GE Stock Report) was the top-performing pup, as its share price climbed 9.1% in April. The advance was sparked by news that the company plans to sell off most of its financial businesses and focus on its diverse portfolio of industrial operations. The funds generated by these actions would help to support efforts to return about $90 billion in capital to shareholders by 2018. The subsequent release of March-quarter results, on the other hand, failed to get a rise out of investors. Foreign-currency headwinds and weakness in the oil-and-gas sector are creating a challenging operating environment for the industrial conglomerate. These factors, combined with the ongoing reshuffling of the company’s business portfolio, means revenues and earnings are likely to remain stuck in neutral for another year.  

Caterpillar (CAT - Free Caterpillar Stock Report) was another bright spot in April. Its stock very nearly kept pace with GE, advancing 8.6% in price. CAT shares had a rough start to 2015, hitting a 52-week low in mid-March, but have since recovered some of this lost ground. The release of March-quarter results helped to provide some support for the rally. Earnings at the heavy-equipment maker climbed 16% from the prior-year period, to $1.86 a share, easily surpassing our expectations for a 17% decline. Still, slowing economic growth in China, a prolonged slide in commodity prices, and a strong dollar continue to raise concerns about the heavy-equipment maker’s near-term prospects, with negative earnings comparisons likely over the balance of 2015.

Lagging Behind

On the other side of the ledger, only two of the Dogs, McDonald’s (MCD Free McDonald’s Stock Report) and Pfizer (PFE - Free Pfizer Stock Report) saw their share prices decline in April. Moreover, the losses were rather modest, at 2.5% and 0.9%, respectively. (By comparison, slightly more than half of the non-Dogs were down for the month.) Revenues at Pfizer remain under pressure from generic alternatives, and foreign-currency headwinds have only added to the challenge. And while March-quarter earnings slightly exceeded Wall Street’s expectations, the drug maker did trim $0.05 a share from its full-year outlook, which now calls for share net to finish between $1.32 and $1.47, versus $1.41 in 2014. Meanwhile, the full-year outlook for McDonald’s has dimmed a bit, too. The strength of the dollar is taking a toll on the fast-food giant as well. More concerning, in our view, is the restaurant operator’s struggles to connect with consumers around the globe, as its restaurants posted negative same-store sales in many key markets, including the U.S. and China.  

Overall, a Dogs of the Dow strategy is likely to appeal to some investors, particularly conservative, income-oriented accounts. Among this year’s pack, nine out of the 10 currently carry an Above-Average or better rank for Safety, which should provide some comfort if the equity market is unable to sustain its recent record levels. Too, this group offers an average yield of roughly 3.5%, well above the current 2.0% median for all dividend-paying stocks in the Value Line universe.  

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