Teaching Old Dogs New Tricks
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Dogs have been on a roll for two consecutive years now. Will there be a third? Better yet, can we teach these dogs a new trick or two and eke out better returns? Of course, I'm referring to the Dogs of the Dow--the ten highest-yielding stocks in the Dow Jones Industrial Average at the beginning of the year. See the following table for this year's Dogs with their yield as of January 3rd, 2012:
|AT&T (NYSE: T)||5.79%|
|Verizon (NYSE: VZ)||5.03%|
|Merck (NYSE: MRK)||4.39%|
|General Electric (NYSE: GE)||3.70%|
|Pfizer (NYSE: PFE)||3.64%|
|DuPont (NYSE: DD)||3.53%|
|Johnson & Johnson (NYSE: JNJ)||3.46%|
|Intel (NASDAQ: INTC)||3.42%|
|Procter & Gamble (NYSE: PG)||3.14%|
|Kraft (NASDAQ: KRFT)||3.11%|
Obviously, one of the goals is to receive better dividend returns with this strategy, but it's more than that. The yields for these stocks are more likely than not going to be higher because they haven't been performing as well as the rest of the Dow stocks. Of course, that doesn't mean the most beaten down will also have the highest yield. Just look at Bank of America (NYSE: BAC). It was the worst performing stock of the Dow yet it's yield was second only to Cisco (NASDAQ: CSCO), which didn't yield a dividend. The bottom line is the Dogs of the Dow should return solid dividends if not also solid stock appreciation, the premise being that the Dogs will rebound.
The problem I see with this strategy is that a lot of people employ it and do so at one of the worst times of the year--at the beginning of the year when the January effect is most likely going to drive stocks up. And if the markets are already up from a good December you better hope the bulls keep chasing the dogs. The strategy is admittedly a set-it-and-forget-it one, but can we improve on it? I think we can.
First, it calls for selling all the previous year's Dogs at the end of the year so you could buy new Dogs. Okay, but hopefully you're still adding money to your account, so why sell a perfectly good stock? Unless the fundamentals change and it's going to tank why do it? In some instances last year's Dogs are this year's as well, so do we buy more or just hold what we have? As long as the company is solid, I would hold, and if it fit in with my asset allocation I would possibly buy more if it's a current Dog.
Which brings me to my second point: Most of us have limited funds with which to invest, and diversification is desirable, yet there isn't a tremendous amount of diversification among our ten Dogs. This year, we have two telecommunications companies and three pharmaceuticals companies among them, so we could probably go with seven Dogs instead of ten. The ones we don't pick can be ruled out by valuation or lower yield or any other metric you'd like to apply. Considering Verizon's lower yield and $2.00 fiasco, especially coming after the follies of Netflix (NASDAQ: NFLX) and Bank of America this past year, I'd be inclined to put that one in the dog house. (Verizon, you should have known better!) Johnson & Johnson, Merck, and Pfizer? Tough one. They're all good companies though Johnson & Johnson is still dealing with recall issues. Based on yield again, I'd go with Merck. Still, if you have enough capital, you can still go for all ten.
The final thorn we'd like to pluck from our Dogs' paws is that of timing. I see no good reason for buying the Dogs in January. I think the dog days of summer would be a lot more appropriate. August and September are usually a bit troublesome for the market. Why not take advantage of that and buy in then? Or better still, follow Warren Buffett's lead and keep some cash on hand while monitoring the Dogs on your watchlist. The Dogs of August may not be the same Dogs of January, so you'll want to monitor the entire Dow Jones 30 sorted by yield. When a bad earnings report comes out on one of the companies or the market takes a tumble as it inevitably will, you can swoop in and snatch up one or more Dogs while they're on sale. Then you just need to sit back, collect your dividends, and throw Fido a bone once in a while.
Motley Fool newsletter services recommend Netflix. The Motley Fool owns shares of Bank of America, Intel and Johnson & Johnson and has the following options: long JAN 2012 $15.00 calls on Cisco Systems, short JAN 2012 $20.00 calls on Cisco Systems and long JAN 2013 $10.00 calls on Intel. kbdunn9 owns shares of Bank of America and Intel and has March 2012 put options on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.