This pack of dividend-paying stocks outruns the ‘Dow Dogs’ By Mark Hulbert | August 8, 2017
Top-performing newsletter taps 10 stocks with fat yields
What better time than the dog days of summer to focus on the so-called “Dogs of the Dow” strategy?
Especially since some believe this strategy for picking dividend-paying stocks “looks ready to break out after six years of moving sideways.”
The Dogs of the Dow strategy, for those of you unfamiliar with it, calls for investing in the highest dividend-yielding stocks among those that make up the Dow Jones Industrial Average DJIA, -0.16% . Such stocks are referred to as “Dogs” because their high dividend yields typically result from those stocks being out of favor among investors.
This strategy took the world by storm in the 1990s on the strength of both its simplicity and its excellent historical performance. Since then its record has been spotty at best, however.
Even if the Dogs were ready to “break out,” however, there is a superior approach to selecting dividend-paying stocks. I’m referring to Investment Quality Trends, an investment newsletter edited by Kelley Wright. The primary difference between his approach and the Dogs of the Dow is that he does not automatically favor stocks just because their dividend yields are high.
Instead, he says we should compare a stock’s current dividend yield to its own past yield. A stock is considered undervalued only if it’s trading at or close to the high end of its historical range.
The proof of the pudding is in the eating, of course. Over the past three decades Investment Quality Trends is the top performing newsletter on a risk-adjusted basis, according to my performance tracking. Furthermore, the newsletter in recent years has performed far better than the Dogs of the Dow strategy — as is illustrated in the accompanying chart.
(The chart reports the performance of two exchange-traded products that follow the Dogs of the Dow or something similar. One, the ELEMENTS Dogs of the Dow ETN DOD, +0.00% adheres to the original Dogs of the Dow strategy; the second, the ALPS Sector Dividend Dogs ETF [ SDOG, -0.16% invests in the highest-yield stock within each of the 10 GICS industry sectors within the S&P 500. SPX, -0.17% )
One crucial consequence of Wright’s approach is that he often considers a lower-yielding stock to be a better value than one whose yield is much higher. Of the 10 highest-yielding Dow stocks currently, for example, Wright’s relative-yield approach identifies only four as being undervalued right now. They are:
-- Coca Cola KO, +0.22% [TICKER KO]
-- Exxon Mobil XOM, -0.08% [TICKER XOM]
-- IBM IBM, -0.62%
-- Pfizer PFE, -0.06%
And just one of these four makes Wright’s “Timely Ten” list, which is the closest he comes to having a best buy list. That stock is IBM.
There are nine additional stocks on Wright’s “Timely Ten” list, even though they are not Dogs of the Dow. They are:
-- CVS Health CVS, -2.26%
-- Cracker Barrel Old Country Store CBRL, +0.16%
-- Gap GPS, +1.27%
-- Lowe’s Companies LOW, -0.39%
-- Omnicom Group OMC, -0.27%
-- TJX Companies TJX, +0.54%
-- Texas Instruments TXN, -0.12%
-- Wal-Mart Stores WMT, -0.34%
-- W.W. Grainger GWW, +0.22%
If history is any guide, a portfolio of these stocks will, over the next several years, outperform a portfolio comprised of only the 10 highest-yielding Dow stocks.
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