The Dogs of the Dow continue to lag overall market

As was the case when we last checked in on this year’s Dogs of the Dow, the group of ten stocks in this year’s group continue to trail the overall market, but they have narrowed the gap a bit.

The last time we looked, near the start of March, the Dow Jones was up a modest 0.3% while the Dogs of the Dow were down 5.5%. Over the last six weeks, the Dow Jones has given up ground, and through the end of April the index was down 2.3% for the year. On the other hand, the stocks in this year’s Dogs of the Dow have improved and are now down just 4.2% year to date.

While the gap has closed, it is important to note the importance of dividends in the strategy. If you stripped away the dividends that the group has been paid so far this year, the average loss would be 5.2%, which is basically in-line with where the group was trading in March before this year’s distributions began.

The whole idea of the Dogs of the Dow is that you would be an equal dollar-weighted position in the ten stocks in the Dow Jones with the highest dividend yields at the start of the year. The strategy assumes that the yields have risen to their levels because the underlying securities fell into oversold territory, and yield hunters would drive shares higher than the overall market in search of income.

The added bonus is that the collection of stocks will enjoy nice dividend payments through the year, and we have already seen where this year’s distributions resulted in the group being down just 4.2% versus 5.2% had there been no dividends paid during the year.

With the market being so volatile as of late, it is not surprising that some of the stock’s in this year’s group have taken a beating. In fact, only three of the ten stocks are in positive territory for the year, with two of the stocks showing major losses which are pulling down the overall group.

Let’s look at each of the ten stocks, and how they have fared so far in 2018. Bear in mind that dividend payments have been included in all return calculations.

Cisco Systems and Merck

Cisco Systems (CSCO) and Merck (MRK) are the top two performers in this year’s group so far. Cisco has managed to greatly outpace the market, with the position rising 15.6% year to date. Merck is also in positive territory, but with a much smaller 5.6% gain on the year. Cisco shot higher following its February earnings report, and the company will next report quarterly numbers on May 16. Analysts expect quarterly profit to rise from $0.58 to $0.65 year over year, which would be enough to push the stock even higher. Merck was showing a lot of weakness earlier in the year, but shares started to rally in April. However, May 1 brought a mixed quarterly report with earnings topping estimates while sales fell short of the consensus. The mixed report brought selling pressure back into the stock, which is now in danger of giving back its recent gains and heading back into negative territory. The outlook for CSCO remains bright, while MRK may struggle to remain in positive territory through the summer months.

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Pfizer and Chevron

Drug maker Pfizer (PFE) was down slightly when we last looked at the position, but it trended higher through April to close out the month with a modest 1.4% gain on the year. However, the company reported disappointing quarterly sales before the market open on May 1, which drove shares 5% lower, and as of the time of this writing the position is now down 3.2% on the year. With the earnings report so fresh, it remains unclear where PFE will find natural support, but the stock will likely struggle to trade back into positive territory for the time being. Rising oil prices have helped Chevon (CVX) trend higher over the last two months, but after a rocky start to the year the position has yet to claw its way back into the green for the year. As of the end of April, the position was down 1.1% year to date, but the company has already reported earnings this season, so CVX is likely to trade in sympathy to oil prices through the summer. Chevron posted mixed results on April 27, with an earnings beat and sales miss, but the market initially pushed shares higher on the better than expected profit before profit taking drove shares a little lower in sympathy to weakness in the overall market. As long as the market finds its footing, and oil prices remain steady, CVX could easily find itself in positive territory in the near future.

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Coca-Cola and IBM

Soft drink maker Coca-Cola (KO) finds itself down 4.3% year to date, while International Business Machines (IBM) has lost 5.1% on the year. KO took a big hit in January when volatility hit the overall market, and while shares have managed to trend sideways over the last three months, there still have a way to go before crossing back into positive territory. Consumers have shifted away from sugary soft drinks, and while Coca-Cola has done a decent job cutting costs and improving its snacks and non-soft drink businesses, the stock will remain under pressure due to the lower soft drink sales. The company posted better than expected numbers on the top and bottom line at the end of April, which initially pushed shares higher, but the gains were short lived, and KO is once again just above its low point for the year. Sentiment remains bearish on the stock and will likely remain that way through the summer months. IBM appeared to be coming back to life during the latter part of 2017 and first part of 2018, but the bears came back into the stock, and shares are trending lower once again. IBM already posted earnings this season, so there will not be a lot of news to help bring momentum back into the stock for the next few months, making it unlikely that the position will climb back into positive territory during the summer months.

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Verizon and Exxon Mobil

Telecom giant Verizon (VZ) has had a tough year, with the position down 5.6%, and Exxon Mobil (XOM) is also in the red, down 7.7%. Verizon recently reported better than expected Q1 numbers on April 24, which pushed shares higher, but the gains were short lived, and the stock has already given them all back plus some. The big news with Verizon is that two big competitors, Sprint (S) and T-Mobile (TMUS) have reached a merger agreement, which should actually help Verizon since it will reduce competition and allow all the major carriers to boost prices, but there is a lot of skepticism as to whether or not regulators will allow the merger for those same reasons. Exxon Mobil has tried to rally over the last month with rising oil prices, but Wall Street remains incredibly bearish on the oil and gas giant, and each of its last two rallies have been short lived before selling returned to the stock. Both VZ and XOM face an uphill battle to move back into positive territory, but Exxon has the best chance since it could make a meaningful charge higher if oil prices trade higher over the summer.

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Procter & Gamble and General Electric

As was the case when we last looked at the group, Procter & Gamble (PG) and General Electric (GE) remain the two weakest stocks, and both have endured big losses on the year. PG is down 19.4%, and GE has fallen by 21.1% year to date. PG has been in a steady decline and has yet to find any level of support to bounce off of. The stock is at a two-year low, and with the company already having reported earnings this season there will not be a lot of news over the next few months that will be able to drive shares higher. GE’s recent performance has been a little more encouraging, with shares finding support mid-April and staging a small recovery over the last two weeks of the months. GE reported better than expected sales and earnings on April 20, which brought a little enthusiasm into the stock, but earnings are falling, and that will make it tough for investors to come back into the stock and help shares erase their recent losses. Both PG and GE are likely to struggle through the remainder of the year, and it will take some big earnings surprises to help either end the year in positive territory.

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Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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