WASHINGTON, January 3, 2013 – As of 11 a.m. EST, the Dow is down roughly 25 points, a modest drop that was to be expected after yesterday’s massive bull run. So today, it’s a day for the dogs, a metaphor we’ll get back to in a minute. (And no, we’re not referring to Congress. This time.) At any rate, technical analysts and gurus will no doubt appreciate this slightly negative meandering as a necessary “consolidation” after January 2’s bracing bout of post-New Year’s Day irrational exuberance.
The usual lame suspects in the financial punditocracy pronounced the big opening day rally as a celebration of Washington’s fiscal cliff non-solution. But more likely it was a combination of short-squeezes and tons of cash on the sidelines due to mass late-2012 profit-taking in Apple, or a re-commitment of funds to high dividend-paying stocks dumped late last year out of a fear of higher taxes on said dividends—some of which will indeed actually happen. Bottom line: there was lots of cash ready to be deployed, and deployed it was. And how.
So today, we “digest.” Maybe even for the next couple of days or weeks until Wall Street decides to fixate on the upcoming March Madness. No, not college hoops. The next debt ceiling debate, which will really tell us if January 1’s latest exercise in Congressional can kicking, will continue. Once the clueless financial media fixates on this, we’ll go back to the kind of sickening action we saw through most of December, although likely worse, because it will be hard for the Fools on the Hill to dodge this bullet. (Oops, sorry for the metaphor, gun fascists. Don’t out us. Please.)
What are the Dogs of the Dow?
Given the utter predictability of the current investing quarter (barring a different kind of irrational exuberance in Iran), let’s take an early-January look at a time-honored large cap investment tactic that has made investors a reasonable amount of money over the years: buying stocks in the “Dogs of the Dow.”
What are these dogs? If you’re not familiar with this tactic, the Dogs of the Dow are the top ten dividend-yielding stocks in the Dow Jones Industrial Average (DJIA) as of the first trading day of the year—in this case, before the opening bell on January 2. For the uninitiated, the “yield” of a stock is the amount of its annual per-share dividend divided by the current price of a single share of the stock. The numbers we’re using below are based on the January 2 close, which is close enough for government work.
The Dogs of the Dow theory is simplicity itself. Given reasonable circumstances and a half decent corporate story line, these top ten dividend-paying stocks begin the year ahead of most large cap stocks in terms of yield. In other words, their high dividends will provide roughly a 3-5% return to investors even if the stocks don’t budge throughout the year.
But, if you believe in the “efficient market theory,” investors will gradually covet those big dividends, pushing the prices of these stocks up to a point where, when combined with the dividend yield, the total return on these stocks will meet or beat the current year’s averages no matter what you do. Ergo, if you buy and hold the entire list on January 2 or thereabouts in 2013, you should beat even the big boys. Such an activity is helped out a good bit by the fact that these large cap Dow monsters have a tremendous stock float out there and are often a “must-have” in trust portfolios and the like, providing tremendous liquidity and tight bid-ask spreads which, trust us, are good things to have in the current environment.
In practice, Dogs practitioners often don’t beat the big boys, particularly in a bull year. But they often—though not always—come out with a pretty decent performance for not a whole lot of work. To wit: in a good year, an adroit trader with good information can easily beat Dow Dogs holders on a percentage basis. But Dog holders simply park their money for a year and vacation in Acapulco (or stay in Cleveland for that matter), and pocket a decent profit on December 31. Hardworking traders have to huff and puff to beat these returns. Not always. But quite frequently. It’s a buy-and-hold strategy that still sort of works.
We’re not necessarily pushing a Dogs of the Dow strategy for 2013. But we thought you might take a look at 2013’s dogs and see what we’re talking about.
For each entry, we’re including yesterday’s closing price, the current dividend yield in percentages (plus the actual current quarterly dividend); the ex-dividend and payout dates when we can find them; and, as value-added, we’re also including the Maven’s own reliably-biased comments on each stock, two of which we don’t plan to buy this year on purely political grounds. (Just like people who hate smoking won’t buy reliably high-yielding tobacco products manufacturer Altria [MO]).
One thing to note: Most of the companies below actually raised their dividends in 2012 by upwards of 10%, and these companies tend to have a good history of doing this with some frequency—another vote in their favor if you favor such things.
A second thing: In recent years, intrepid investors and advisors have devised many ways that you can allegedly refine on and improve on the returns on the Dogs. You can sleuth these out on the Internet. All may or may not work, although each inventive investor or analyst touts his theory as the best. Right. If you don’t like to do a lot of work, stick with the original.
So again, in keeping with the appeal of simplicity, the list below is just a straightforward, unrefined list of this year’s Dogs, along with current yield stats and witty original commentary by the Maven where required. Take a look. One could do worse than own at least a couple of these in his/her portfolio. But do remember: the actual Dogs theory requires that you buy, say, 100 shares of each to play the game. Your call.
The 2013 Dogs (Highest to Lowest Dividends)
AT&T (NYSE: T): Price at yesterday’s close: $35. Dividend yield 5.14%. Upcoming quarterly dividend (currently 45 cents and payable quarterly) will be paid on February 1, 2013. The stock goes ex-dividend on January 8, 2013. Once known in the trade simply as “Telephone” (for its “T” symbol and the fact that this was once the telephone monopoly prior to the initial company’s breakup), the current AT&T evolved primarily via a merger between Baby Bells SBC and Bell South. Stock a reasonably good buy at this point, but see Verizon below. We also worry about AT&T’s persistently bad signals outside of major urban cores, one reason why we moved our wireless phones to Verizon several years back. AT&T claims to be working on this, but, anecdotally at least, we’re not seeing good results.
Verizon Communications Inc. (NYSE: VZ): Price $44.27. Yield 4.65%. Current dividend: $0.515 per share. Ex-dividend: January 8. Dividend payable: February 1. The East Coast-centric behemoth also offers its all-fiber FiOS TV and Internet packages and is half-owner of Verizon Wireless. (The other half is owned by British telco Vodaphone [VOD]). Stock a reasonably good buy at this point. We’ve been in and out. Once things settle down, we’ll likely go back in again as this is a relatively stable port during budget storms.
Intel Corporation (Nasdaq: INTC): Price $21.38. Yield 4.25%. Dividend: $0.225 per share. Next ex-date will occur late January with a pay date in early March. Volatile chip giant has been quite unpredictable lately in a changing market. Dividend, though, remains high. Given current tech uncertainties, hard to make a buy call on this one.
Merck & Co. Inc. (NYSE: MRK): Price $41.34; Yield 4.16%. Dividend: $0.43. Current dividend already ex, to be paid out January 8. Next ex-dividend date likely early to mid-March. Merck was the absolute favorite stock of the Maven’s late father who bought and held it for decades, reinvesting dividends and making a small fortune out of the holding. It’s a proven earner. That said, the company recently withdrew support for the Boy Scouts in a corporate fit of political correctness. Like Carbonite (CARB) before it, this is political grandstanding by a management attempting to curry political favor with the current administration. Strategy will work for now, but we won’t invest in companies that indulge in this sort of behavior. Sorry, Dad.
Pfizer Inc. (NYSE: PFE): Price $25.91. Yield 3.83%. Dividend: $0.24. Next Ex: January 30. After its merger with Wyeth, this once fading drug giant seems to be making all the right moves. Like all the majors, it colluded with the Administration in developing Obamacare to protect and enhance its profitability. That could work against the company in the future, but it works right now. Plus, they still haven’t trashed the Boy Scouts. We’ve been in and out of this one profitably on several occasions. Now out, but looking to get back in.
DuPont (NYSE: DD): Price $45.87. Yield 3.75%. Dividend: $0.43. Next Ex: Late January. Chemical and agricultural giant had a so-so 2012, could improve this year, helped by rock-bottom natural gas prices. A possible portfolio add once things calm down and get clearer in Washington.
Hewlett-Packard (NYSE: HPQ): Price $15.02. Yield 3.52%. Dividend: $0.132. Just paid a dividend, should next go Ex: circa January 20. A notorious dog, once dominant in the PC and printer business, now a mess due to horrendous decisions by upper management. Relatively recent CEO Meg Whitman may—or may not—be able to turn this company around. Analysts have been touting it, but we regard the jury as still out on this one and haven’t touched it for years. Dividend was raised last year, but this is one company that could possibly cut the dividend this year if things don’t improve soon.
General Electric (NYSE: GE): Price $21.34. Yield 3.62%. Dividend: $0.19. Latest dividend will pay out later this month. Next Ex date: circa first half of February. This company isn’t what most investors think it is. Yes, it’s involved in big-time manufacturing, ranging from refrigerators and other appliances to giant locomotives. But it’s also heavily influenced by (and until recently has been held back by) its massive GE Credit financing division which provides its services to large corporations like Lowes (LOW) and others which use its card services. This was the division that got GE into big trouble during the crash of 2008-2009, though it’s digging out now. In any event, analysts are touting it again and it’s been doing well recently after being dead as a stock for years. That said, CEO Jeff Immelt has been in the tank for years with the current administration and managed to sneak in another huge corporate welfare payment for its wind-power products division, saddling American taxpayers with another mountain of debt for no likely return. No matter what the bigwigs say, we’re not biting and won’t touch the stock. No point in encouraging such behavior.
McDonald’s Corp. (NYSE: MCD): Price $90.12. Yield 3.42%. Dividend: $0.77. Next Ex date: likely near the end of January. MickyD’s stumbled a bit in 2012 after a string of astonishing earnings improvements throughout the ongoing Great Recession/Great Depression II. They’ll likely regain their footing this year assuming meat prices don’t go through the roof. In any event, this is a stable investment in a world that doesn’t have many. It’s a little high right now, but if “Fiscal Cliff II: The Budget Ceiling” crashes the market in March, this might be one place to hide as soon as the price drops. Holding off for now.
Johnson & Johnson (NYSE: JNJ): Price $70.84. Yield 3.44%. Dividend: $0.61. Ex: February 22. Payable: March 12. Drug, pharma, and consumer products giant has stumbled in recent years, running into serious quality issues in some of its subsidiaries’ manufacturing facilities leading to costly suspensions, recalls, government hissy fits, etc. Should start regaining its footing this year as the sloppiness settles down, which is good. Save for recent years, this has been one of the best-run American companies ever. If it can regain its rep and corporate mojo, could be a good port in the storms ahead. Analysts are currently neutral to positive and we’re holding our fire for now. But again, if Congress and the White House start acting juvenile again—likely—this again could be a good refuge after a major market swoon.
That’s it for the 2013 Dogs of the Dow and for today’s hopefully helpful column. Look for other top January tidbits like this year’s Super Bowl market indicator in coming columns. Meanwhile, enjoy today’s apparently quiet Wall Street consolidation. The new Congress is sworn in today and the wild rumpus will re-commence soon enough.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate. The author does not currently hold any shares of the Dow Dogs.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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