by Dan Burrows | December 30, 2013 1:51 pm
The Dogs of the Dow didn’t hunt in 2013, and there’s little reason to pursue the investment strategy next year, regardless of how hungry you are for yield.
The Dogs of the Dow approach is pretty simple and straightforward. All you have to do to run with the Dogs of the Dow is buy the 10-highest yielding dividend stocks in the Dow Jones Industrial Average at the start of the year.
It’s a value-investing approach, the idea being that these stocks have been beaten down, and that’s partly why their dividend yields are so high. With the Dogs of the Dow, you’re betting on a bounce-back from names that are out-of-favor and therefore cheap.
It also doesn’t hurt that the Dogs of the Dow collectively throw off a fairly generous and dependable dividend.
However, there are a bunch of problems with the Dogs of the Dow strategy heading into 2014 that argue against the approach.
For one thing, historically, the Dogs of the Dow haven’t lived up to the hype for a long time. The 10-highest yielding stocks in the Dow haven’t beaten the blue-chip index for the two decades ended 2011. And last year, the Dogs of the Dow only matched the Dow’s gains. There was no benefit to taking this concentrated — and therefore riskier — approach.
More recently, in 2013, the Dogs of the Dow underperformed the Dow Industrials. With the year just about in the books, the Dogs of the Dow have put up an average gain of 24%. The Dow is up 26%, while the S&P 500 gained 29% for the year-to-date.
Add in the dividends and the Dogs of the Dow have a total return of 28% so far this year. That only matches the Dow Industrial’s total return, and lags the total return of the S&P 500 by 4 percentage points.
Another problem with following the Dogs of the Dow strategy in 2014 is that these stocks don’t look particularly cheap, which hardly makes it this a good way to bet on value stocks.
The average forward price-to-earnings multiple (P/E) of the 10 Dogs of the Dow is 13.5. That’s not much of a difference from the 30 stocks in the Dow Industrials, which collectively fetch 14 times next year’s earnings. If anything, the P/E on the Dogs of the Dow looks a bit rich when you consider that these stock are forecast to post average earnings-per-share growth of just 6.8% in 2014.
Nope, the Dogs of the Dow are by no means barking bargains — and that means they’re not value plays.
The Dogs of the Dow strategy also suffers from the fact that times have changed since it was first popularized almost a quarter of a century ago. As Barron’s notes[1], the Dogs of the Dow approach ignores share buybacks, which have become the primary way in which companies return cash to shareholders. Dividend yield alone isn’t much of a predictor when so much market upside is being driven by record levels of retired stock.
Lastly, none of the 10 stocks in the Dogs of the Dow have been beaten down this year. In no case has the market over-reacted to the point that these stocks are spring-loaded for outperformance next year.
Indeed, the Dogs of the Dow are all positive this year — but, again, they underperformed the broader market. There is no Best Buy (BBY[2]) or Hewlett-Packard (HPQ[3]) here — no stock that was crushed a year ago and prepared to bounce back with triple-digit percent gains.
Below are Dogs of the Dow for the new year, as of Dec. 30. Can you really see this portfolio going gangbusters in 2014?
| Stock | Ticker | Dividend Yield | YTD Performance |
| AT&T | T[4] | 5.23% | 4.3% |
| Verizon | VZ[5] | 4.31% | 13% |
| Merck | MRK[6] | 3.53% | 21% |
| Intel | INTC[7] | 3.52% | 25% |
| Pfizer | PFE[8] | 3.39% | 22% |
| McDonald’s | MCD[9] | 3.34% | 10% |
| Chevron | CVX[10] | 3.19% | 16% |
| General Electric | GE[11] | 3.16% | 32% |
| Cisco Systems | CSCO[12] | 3.09% | 13% |
| Microsoft | MSFT[13] | 3% | 39% |
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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