After a dismal 2015, during which it lost 2.3%, the Dow Jones Industrial Average (DIA) has just completed a spectacular year. The blue-chip index soared in 2016, gaining 13.4% even as all the other benchmarks recorded spectacular gains. Markets survived early blues from slowing growth in China’s economy as well as the “Brexit” which occurred mid of 2016.
Some of the key factors that contributed to these strong yearly gains for major benchmarks are a Trump-induced rally, the Fed’s rate hike, improving domestic economy and an oil price rally.
Performance During 1H-2016
The Dow suffered its biggest monthly loss since Aug 2015 in Jan 2016, losing 5.5%. These losses were primarily attributable to a slump in oil prices and concerns about China’s economy. Most earnings reports and domestic economic data failed to instill confidence. The index rebounded in February, gaining 0.3% and experiencing its highest pace of increase since Nov 2015.
Stocks experienced a rebound in March following the resurgence in oil prices and reassurances from the Fed about rate hikes. As a consequence, the Dow gained considerably by 7.1%. Oil prices continued to boost markets in April and May and the index advanced by 0.3% and 0.1% over these months. The blue-chip index managed to sustain its winning run into June, increasing by 0.8% even as concerns over a Brexit and the Fed’s reluctance to hike rates led to losses for other benchmarks.
Performance During 2H-2016
In July, the Dow gained 2.8% on the back of a modest increase in earnings numbers and impressive economic data. However, the index slipped in August, losing 0.2% following rising prospects of an interest rate hike. The index also suffered losses in September, declining by 0.8% following rising uncertainty over the likelihood of a Fed rate hike.
The Dow continued to suffer in October, losing 0.9% due to uncertainty related to the upcoming presidential election, volatile oil prices and dismal job data. The index recorded its best monthly gain since March in November, rising 5.4%. By this time, the Trump-induced rally had begun. President-elect Donald Trump’s fiscal-stimulus proposals and OPEC’s decision to cut oil production for the first time since 2008 also added to the euphoria, while holiday season sales gained ground. The Trump induced rally continued to power the index over December and the Dow gained 3.3%.
Dogs of the Dow
Dogs of the Dow, an investment strategy popularized by Michael B. O’Higgins in 1991, has been the darling of yield-seeking investors as it guarantees steady return irrespective of market conditions. How does that happen?
The Dogs of the Dow are essentially the top 10 dividend-paying blue-chip stocks of Dow Jones Industrial Average. The built-in dividend income strength and good reputation of these companies ensure a strong price appreciation. But their high dividend is the key attraction.
High dividend yields suggest that these stocks are in the oversold territory and will rebound faster than any other stock when the business cycle changes. This would result in higher capital appreciation over the one-year period along with juicy yields.
From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging an annual return of 14.3%, compared to 11% for the Dow. The performance between 1973 and 1996 was even more impressive, as the Dogs returned 20.3% annually, while the Dow produced a 15.8% return.
In 2013, the Dogs provided an average yield of 3.6%, compared to 2.6% for the DJIA. The average yield of the Dogs exceeds that of the DJIA by nearly the same margin this year.
5 High Yielding Dow Stocks
Below we present five stocks from the Dow with the highest dividend yields, each of which also has a favorable Zacks Rank.
Performance of 5 Dogs of the Dow vs DJI (1 Year)
Let’s take a look at each one: