Dogs of the Dow 2014: Which ones to buy?

Dividend strategy still works. Sometimes. Photo: Wikipedia

WASHINGTON, January 2, 2014 – It’s the first trading day of 2014: time for us all to adopt those brilliant get-rich-quick-in-the-stock-market strategies we’ve been plotting out during the end-of-year holiday festivities during those times not spent consuming mass quantities of adult beverages. One of the old stand-by strategies many veteran investors adopt, in addition to year-end bounceback stocks (continued here and here), is to pick up shares of the “Dogs of the Dow.”

Today, as a belated Christmas present to our readers, the Maven, Santa, and the puppy pictured above offer you a list of the Dow Dogs 2014 edition, our explanation, our comments, and our top picks from the list.

Although creative investors have developed some variations on this strategy, the basic strategy itself is quite simple: Just pick up shares of the top 10 or top 5 yield stocks in the Dow Jones Industrial Average, hold ‘em for a year, and reap those profits that are sure to flow—not to mention those swell dividends While-U-Wait.

The problem is, this venerable strategy, which used to work fairly reliably, has not always worked well in recent trading years, for whatever reason.

Dave Fry of ETF Digest frequently refers to the Dow Jones Industrial Average (DJIA, or simply “the Dow”) as “window dressing for the tourists.” And in general, he’s right. This long-of-tooth average is a far less reliable indicator of the stock market’s general direction and tone than the much broader-based S&P 500 index. Yet that’s the number the dimwitted financial media continues to drop in to its nightly newscasts and morning headlines.

The main reason behind the Dow’s lessened utility for investors is really quite simple: Representing—with occasional changes in its roster—America’s biggest industrial companies as broadly defined, the Dow actually represents only a fraction of all stocks traded on all exchanges. Further, this small fraction of corporate behemoths tends to consist of mature industries whose stocks often boast decent dividends the better to replace a company’s diminished prospects for robust growth in mature industries.

SEE RELATED: Stock Picking I: 2014 year-end bounce back stocks

The best current example of this might be Microsoft (MSFT). In its early days it was a tech high-flyer as its software products and ubiquitous DOS and later Windows operating systems drove statistically all personal computers in what had become a brand new, rapid growth industrial sector whose size and influence no one could have foreseen even a decade earlier.

Microsoft today still makes plenty of money. But under the able but plodding leadership of Steve Ballmer, the company lazily slipped into steady, low-growth mode, losing its innovative edge while sustaining its earnings by copycatting Japanese game systems and sneakily adopting, bit by bit, most elements of Apple’s slick operating system into its ugly, clunky Windows OS.

I.e., MSFT became a classic, commoditized Dow Jones Industrial. Today, you’re not likely to lose your shirt buying Microsoft stock. But your capital gains, if any, won’t win you neighborhood portfolio bragging rights. Then again, Microsoft’s nifty dividend will handily beat anyone’s checking account interest, treasury bill yields and bank CD rates hands down, so why should you care?

Despite the ongoing Great Recession/Great Depression II—masked in the stock market at least by the persistent effects of the Fed’s monetary stimulus—most investors even today remain relatively heedless of stock volatility and tend to seek stocks with high growth prospects. To paraphrase a great American, “Damn the dividends and full speed ahead!” That tends to rob stocks like Microsoft and its ilk in the DJIA of excitement and sex appeal.

SEE RELATED: Stock picking II: More 2014 year-end bounce back stocks, plus taper news

Nevertheless, if you combine the swell dividends in the lowliest DJIA stocks with their often bargain-basement prices, you have at least a fair chance of making money. 

With the caveat that nothing ever works all of the time, here’s a list the 2014 Dogs of the Dow, from lowest to highest yield:

  1. Microsoft (MSFT). Yield: 3.0%.
  2. Cisco (CSCO). 3.1.
  3. General Electric (GE). 3.2.
  4. Chevron (CVX). 3.2.
  5. McDonald’s (MCD). 3.3.
  6. Pfizer (PFE). 3.4.
  7. Intel (INTC). 3.5.
  8. Merck (MRK). 3.5.
  9. Verizon (VZ). 4.3.
  10. AT&T (T). 5.2.

Our recent approach to investing in the Dow Dogs is to cherry pick the list. Not all of them will work, but we hope to choose the likeliest.

If we were forced to make choices here, our top pick this year would be AT&T (T), simply for its ridiculously juicy dividend. Additionally, however, unlike its larger rival, Verizon (VZ), T is not going to be saddled with the large debt VZ has taken on for it purchase of the balance of Verizon Wireless from Vodaphone (VOD). For that reason, we suspect, T will outperform VZ in 2014. But capital gains for both stocks are likely to remain limited when compared to those high-flying S&P 500 stocks.

Our next choice of Dogs would be energy giant Chevron (CVX). The stock has already had a fantastic run in 2013. Yet its dividend, a decent 3.2 percent, is likely to get another boost this year. The company’s judicious remixing of assets in an energy-centric century also adds value. Expensive in dollar terms, the stock remains cheap PE-wise and could boast substantial appreciation this year even as you collect those dividends.

After Chevron, we’d take a look at Intel (INTC). It’s been fashionable to diss this chip giant in recent years for running a bit behind the mobile computing curve, which it indeed has. Yet the company remains profitable, its products are of predictably high and consistent quality, and its newest chips are likely to be highly competitive in today’s mobile marketplace.

In addition, the death of the PC has been greatly exaggerated. Mobile devices can’t really replace PCs in many business situations, and Intel continues to own this market on both PC and Mac platforms. What’s not to like about that?

Intel also offers an unusually high dividend for a tech company, most of which pay no dividend at all. The stock tends to move in a narrow range, but buying it on dips early in the year could be a good strategy. Techs tend to sink in summer months, then bounce back ending each year with strength. INTC might be worth the rocky ride in 2014.

Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Positions mentioned above may 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.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.


This article is the copyrighted property of the writer and Communities @ Written permission must be obtained before reprint in online or print media. REPRINTING TWTC CONTENT WITHOUT PERMISSION AND/OR PAYMENT IS THEFT AND PUNISHABLE BY LAW.

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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  



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