The “Dogs of the Dow” investment strategy is typically a year-end/year-beginning phenomenon, but today I want to show you how this income-centric tactic can do wonders for you as we near 2017’s midway point.
It doesn’t feel like 2017 is nearly halfway over. We’ve seen the major market indices hit all-time highs, and stocks go on unprecedented winning streaks despite geopolitical uncertainty and mixed quarterly earnings results. Still, the Dow Jones Industrial Average is up nearly 5.5% for the year, and is trading only 1.3% down from a record high set back on March 1.
But, if you’ve been long the Dow for the past several weeks, you’re likely more than a little disappointed. The Trump rally appears to have fizzled out, and many Dow stocks are now treading water and consolidating year-to-date gains.
While many investors will be taking the “sell in May and go away” approach over the next few weeks, now might be the perfect time to reassess your holdings, change up investments and prepare for growth heading into the second half of 2017.
One way to do this is to revisit the Dogs of the Dow investment strategy. The premise of the Dogs strategy is to buy the 10 Dow stocks with the highest yield in December, then hold them through the end of the year. While not a fail-proof investment strategy, it has outperformed the Dow Jones itself for the past seven years.
With a little more than half the year to go, I suggest revisiting the Dogs of the Dow strategy now to add some much-needed oomph to your portfolio before rising interest rates completely eat into yield returns. Snapping up these mid-year dogs can be accomplished easily via options — and may even earn you some much-needed cash in the process.
Dogs of the Dow: Verizon (VZ)
It hasn’t been a very good year for Verizon Communications Inc. (NYSE:VZ) stockholders. Despite offering the highest yield of any Dow component (5.04%), VZ is down more than 14% year to date. The company has had to capitulate to the unlimited mobile data movement spurred by a resurgent T-Mobile US Inc (NASDAQ:TMUS), which has eaten into Verizon’s bottom line more than a little.
However, the company still offers the best wireless network in the country. Furthermore, Verizon is already taking the lead in preparations for the next big thing in wireless broadband data, beating out AT&T Inc. (NYSE:T) in a bidding war for 5G specialist Straight Path Communications Inc.
Technically, VZ stock is trading near annual lows, but price support has been firm in the $45 region. With an impressive yield and strong prospects for the rest of 2017, this consolidation period may be the perfect time to add this dog of the Dow to your portfolio.
The Trade: One way to acquire VZ stock without breaking the bank is to sell a May $45.50 put, currently bid at 19 cents, or $19 per contract. Doing so allows you to pick up VZ stock for $45.50 per share once it dips below the strike — and you collect $19 per contract for doing so.
Dogs of the Dow: Chevron (CVX)
At the No. 2 spot in the Dogs of the Dow listing, Chevron Corporation (NYSE:CVX) arrives nearly a full percentage point behind Verizon when it comes to yield, offering 4.08%.
The oil baron has seen many false starts in 2017, as oil prices bounce around on promises from OPEC to extend production cuts, surprise drawdowns in U.S. petroleum supplies and hints of slackening global oil demand.
The good news for Chevron is that the summer driving season is upon us, and sure to lift demand and oil prices. Furthermore, recent weakness in the U.S. economy is believed to be a minor blip in the road, with even the Fed showing confidence by all but promising a rate hike next month.
The Trade: With price action for CVX stock has stabilized in the $105 region, one way to be sure to acquire the shares — and pocket a little cash in the process — is to sell the May $105 put and simultaneously buy the May $106 call.
This bull reversal spread was last bid at 55 cents, or $55 per pair of contracts, and allows you to buy CVX for $106 if the shares trade north of the bought call at expiration. Additionally, if CVX dips below $105 ahead of expiration, you can pick them up for $105, still pocket the $55 premium and reap the dividend.
Dogs of the Dow: International Business Machines (IBM)
International Business Machines (NYSE:IBM), at No. 3, sports a yield of 3.99%, but it’s going to take some faith in Big Blue to bet on a comeback for IBM stock. Shares were hit hard back in April due to an abysmal first-quarter earnings report, and were punished again last week after Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B, BRK.A) sold off a third of its holdings in the company.
But there are several bright spots left for IBM that the Street is overlooking in favor of sensationalist headlines.
First, IBM is seeing strong growth in its cloud computing division, which jumped 33% last quarter. Second, the company is a market leader in artificial intelligence, with its Watson line of servers infiltrating everything from video games to VR to healthcare systems — all of which are highly lucrative and rapidly expanding markets.
Technical support should hold near the $150 region for IBM, but if the shares dip below $150, this is the time to buy.
The Trade: Once again, you can pocket a little cash in the process by selling a May $150 put, which was last bid at $1.01, or $101 per contract. And remember, the stock returns will come with time, but the dividend yield is the real benefit to owning IBM stock.
Dogs of the Dow: Pfizer (PFE)
With a yield of 3.88%, Pfizer Inc. (NYSE:PFE) comes in at No. 4. Unlike our previous stocks, though, Pfizer has actually limped to a gain of about 1.6% so far in 2017.
Given the current uncertainty surrounding the healthcare bill in Washington, a bit of underperformance is to be expected. However, Pfizer has excellent prospects down the road, and should return to solid growth in no time.
For instance, Pfizer has some 34 drugs in late-stage development, and another 20 in phase 2. Furthermore, its dermatitis drug Eucrisa won FDA approval in December, with analysts projecting annual sales of $2 billion. And the company’s acquisition of Medivation last could see another $5 billion in annual sales from prostate cancer drug Xtandi.
Technically, PFE rallied sharply at the beginning of 2017, but has spent the past several months consolidating in the $33 region.
The Trade: If you’re looking to own Pfizer stock, a bull reversal spread can do just that — and pay you a premium for doing so. Simply sell the May $33 put and simultaneously buy the May $33.50 call. This spread was last bid at 12 cents, or $12 per pair of contracts. You own the shares if PFE dips below $33 — which it should not stay below for very long. You also own the shares if PFE rises above $33.50, and you’ll still bank the $12 premium and be on track to collect the dividend.
Dogs of the Dow: Exxon Mobil (XOM)
In case you missed it, I wrote about Exxon Mobil Corporation’s (NYSE:XOM) prospects last week. The outlook for the No. 5 Dog of the Dow remains the same — expect the shares to languish in the $82-$83 region while oil prices remain questionable.
As with Chevron, OPEC and faltering global consumption are Exxon’s main roadblocks to higher climates.
For better or worse, XOM stock has spent most of 2017 bouncing around between support at $80 and resistance near $83. Shares have shown little motivation to break out of this trading range, leaving Exxon longs with few options in terms of returns. But XOM does offer a dividend yield of 3.73%, which is none too shabby, and makes owning the shares worthwhile despite fluctuations in oil prices.
The Trade: With a solid trading range, selecting options strikes to gain ownership of XOM stock is easy. Right now, you can sell the May $82.50 put for 34 cents, or $34 per contract. Doing so should have XOM stock assigned to you if the shares dip below $82.50 before the end of the week, while allowing you to pocket the premium received and put you on course for the dividend.
Dogs of the Dow: Cisco (CSCO)
If I had to pick one of the current Dogs of the Dow to own, it would be our No. 6 contender, Cisco Systems, Inc. (NASDAQ:CSCO). And if you want to pick up CSCO shares cheap, you’ll have to act soon — the company is slated to release its quarterly earnings report after the close this Wednesday.
Cisco is a market leader in business networking solutions and is seeing significant growth in its cloud services operations. Furthermore, the tech giant is making AI a priority moving forward, as indicated by its acquisition of MindMeld last week — a purchase that sent CSCO stock down nearly 3% for the week.
Despite those losses, Cisco still is up nearly 10% for the year, outstripping its peers in the Dow.
The Trade: With earnings on tap this week, premiums are high. And while elevated premiums are bad for speculative options traders, they can provide additional income for anyone looking to own CSCO stock.
For instance, the May $33/$34 reversal spread was last bid at 11 cents, or $11 per pair of contracts. As with the above spreads, this one will assign you CSCO stock if the shares dip below $33 ahead of expiration, or allow you to purchase Cisco for $34 if the shares rally following earnings.
And don’t forget that Cisco pays out a dividend yield of 3.47%.
Dogs of the Dow: General Electric (GE)
While General Electric Company (NYSE:GE) has been around for ages, this final dog is not your father’s GE.
Sure, General Electric pays out a respectable dividend yield of 3.4%, but the company also is in the middle of a transition toward the modern marketplace and has considerable growth prospects. In fact, GE has grown into a market leader in the industrial internet of things, providing IoT solutions for geotracking land surveying, automated worksite monitoring and even autonomous construction solutions. As a result, GE is projecting revenue of $225 billion by 2020.
Now, because the company is in transition toward ramping up revenue in the new IoT market, analysts have come out of the woodwork recently to downgrade GE stock due to cash flow concerns. Admittedly, it’s an unusual position for a long-term growth company like General Electric to find itself in, but growth is still there, and the stock remains a staple for many investors.
If you don’t already own the shares, GE stock’s price weakness offers a perfect opportunity to dive in.
The Trade: Following Friday’s dip, you can rake in 10 cents, or $10 per pair of contracts, from a May $28/$29 reversal spread. What’s more, if selling pressure pushes the shares below $28, you could be assigned GE for $28 per share — a bargain given the stock’s growth potential. And if GE rallies above $29, you can snap them up on the rebound before prices fully recover.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.