The Dogs of the Dow is a respected and popular investment strategy. But if you’re really wanting Exxon Mobil (NYSE:XOM) to pay dividends in more than one way, it’s finally time to consider buying XOM stock for what shares are offering investors both off and on the price chart. Let me explain.
The income-prioritized Dogs of the Dow is a popular approach for buying the Dow Jones Industrial Average’s highest-yielding — and typically out-of-favor — blue-chip stocks at the beginning of each year. Then, investors rebalance those holdings 12 months later. At the end of 2019 venerable companies such as Coca-Cola (NYSE:KO), Cisco (NASDAQ:CSCO) and Verizon (NYSE:VZ) all made the annual list. But with the exception of Dow (NYSE:DOW), Exxon’s 5.6% yearly income stream topped them all.
This strategy is based on the expectation that attractive income will ultimately draw in increasingly aggressive investors. These investors will then bid up share prices and normalize the inflated, above-market dividends over the course of a year. And it has worked, too. During the broader market’s historic bull run, the dividend-driven strategy has managed to outperform the Dow Jones by more than a percentage point each year.
Many income investors obviously hope this trend will continue into the next decade. But in 2020, a separate trend on the price chart has proven challenging for Exxon Mobil’s shareholders.
XOM Stock Monthly Chart
XOM stock has shed just under 14% since the beginning of the year. Much of the weakness is of course tied with the price of oil plummeting on coronavirus-driven fears. Still, in a market which also values buying into panicked behavior at opportunistic price levels, today’s “improved” yield of 5.6% in Exxon is increasingly worth monitoring for a spot in the portfolio.
At the start of 2020, Exxon was far from looking like a good purchase. In fact, the proffered advice at InvestorPlace in early December was to short XOM. At the time, I expected the uncompleted broadening pattern would pressure shares toward $60.
The forecast proved prescient, and then some. The good news for Exxon stockholders at this point is that shares are now trading inside a key price zone backed by a 10-year, 62% Fibonacci level, pattern support and important lows from 2018 and 2015. It’s time to monitor shares for what could turn into a major bottom for the stock.
My recommendation is for investors to watch XOM stock form a technical low that is confirmed either by price action or its chart. I’d also suggest waiting for a bullish stochastics crossover. And for even more like-minded investors, collaring Exxon with a protective put and short call is the preferred strategy. That keeps potential doggish action from taking a nasty bite out of the portfolio.
Investment accounts under Christopher Tyler’s management do not currently own positions in securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.