2019 Dogs of the Dow Slightly Ahead of the Market

 

This year’s group of stocks in the Dogs of the Dow have gotten off to a good start on the year, with eight of the ten stocks in this year’s group showing positive gains for the year.

The collective group is up 10.4% including dividends, versus the overall Dow Jones which has appreciated 10.1% since the start of the year. If you pulled out the dividends the stocks have paid so far this year the group would be up 9.6%, which shows just how powerful dividends are to a portfolio’s overall returns.

For those of you not familiar with the Dogs of the Dow strategy, it is basically purchasing an equal dollar weighted amount of the ten stocks in the Dow Jones with the highest dividend yields at the start of the calendar year, and holding those positions for the entire year regardless of individual performance. The strategy assumes that the stocks yields have risen too high because the underlying security is undervalued.

We have seen a lot of success in the strategy in the years we have tracked it, and this year the group is off to a good start. Let’s look at each stock and how they have performed so far.

Note: all return figures include dividend payments made to shareholders.

IBM and Cisco are Well Ahead of the Market

The two tech giants in this year’s group are well ahead of the market at this point. After years of struggling, International Business Machines (IBM) stock has come to life in 2019 and shares are up 23% on the year including one dividend payment. IBM was the second worst performer in the Dogs last year, but after hitting a 52-week low in December the stock has rallied, and was fueled in part by better than expected top and bottom line Q4 numbers in January. The company will report its next set of numbers on April 23, and if it is able to show another solid set of results the stock should build on recent gains. IBM is trading at $138.59 with an average price target of $151.73.

Cisco Systems (CSCO) was one of the top performing stocks in last year’s group, and it has continued its winning ways in 2019. Year to date the stock has appreciated 22.7% including the company’s first dividend payment of the year. The stock did sell off during the December market correction, but after hitting a low in late-December the stock has been on a tear and shares are currently trading at a new 52-week high. In mid-December the company posted mixed quarterly numbers, with profits coming in higher than expected while sales were just a bit under the $12.41 billion consensus at $12.4 billion. The stock rallied on the earnings beat, and investors remain very upbeat on the company. Cisco will next report earnings on May 15. CSCO is trading at $52.78 with an average price target of $54.81.

Oil Giants Exxon and Chevron are Beating the Market

Oil stocks have been strong during the first part of the year, and recent developments in Saudi Arabia and Venezuela are keeping strength in the sector. Saudi Arabia has announced plans to produce less than 10 million barrels per day in April, and power outages in Venezuela have resulted in rig shutdowns. Both situations should keep strength in oil prices.

Exxon Mobil (XOM) has paid one dividend on the year, and the position is currently up 19.3%. Likewise, Chevron (CVX) has already made its first dividend payout, helping that position gain 15.6% since the start of the year. Both companies reported quarterly numbers on February 1, and each posted negative earnings surprises. The misses caused a short selloff, but investors quickly came back into each stock as oil prices firmed. Each company will next report earnings on May 3. Analysts see decent upside in both stocks at this time. XOM is trading at $80.37 with an average price target of $86.25, while CVX is at $124.20 with an average price target of $138.42.

Procter & Gamble and JP Morgan are Keeping Pace with the Market

Consumer goods maker Procter & Gamble (PG) outperformed the market in 2018, and so far in 2019 shares are basically in-line with the Dow Jones, up 10.1% (including one dividend payment). The stock has trended steadily higher since last summer and was able to avoid the majority of the market selloff in December. With the recent gains, PG is now sitting just shy of its all-time high, The company posted better than expected numbers on both the top and bottom line in January, with earnings up 5% year over year. The market remains very bullish on the stock, which is currently trading at 21 times future earnings with profits forecast to rise 6.2% per annum over the next five years. The company has paid out its first dividend for the year and will report its next set of quarterly numbers on April 24. PG trades at $100.85 with an average price target of $98.08.

JP Morgan (JPM) has had a decent start to 2019, but the stock is just barely underperforming the market with a year to date gain of 8.7% including one dividend payment. The stock was not a part of last year’s group, but after a big sell off during the last month of the year the stock’s yield rose enough to make it into this year’s group of stocks. JPM hit a low in December during the market correction but has made back a lot of its December losses. The stock failed to break through resistance at $106 in February, and that is the level shares need to climb above for the stock to really start to rise. The company had disappointing quarterly numbers in January and will next report on April 16. If we see a positive earnings report the stock should easily break above its resistance and start to use $106 as a solid level of support moving forward. JPM is trading at $104.80 with an average price target of $119.17.

Merck and Verizon Trail the Market but are in Positive Territory

Pharmaceutical giant Merck (MRK) was last year’s strongest performer. In 2018, when the Dow Jones was down 5.6%, our MRK position appreciated 41.6% including all four dividend payments. This year the stock has cooled off a bit, but remains up 6.6%, and will be slightly stronger after the first dividend payment is made on April 5. Given last year’s strength, it was expected that the stock would cool, and the stock avoided the market selloff in December that drove a lot of stocks lower and resulted in bigger than normal gains as the overall market recovered. MRK is a solid stock, and shares are currently trading just pennies below the 52-week high. Q4 numbers in early February topped estimates on both the top and bottom line, and the company will next report earnings on May 3. Despite trailing the overall market, MRK remains one of the strongest stocks in this year’s group. The stock trades at $81.85 with an average price target of $82.83.

Telecom giant Verizon (VZ) is also coming off a strong 2018. The stock helped last year’s group with a total gain of 14.7% including dividends. After selling off with the overall market in December, the stock regained its strength but was unable to break through resistance at $58 in January. Shares are once again testing that level of resistance, and if they are able to break through the stock should manage to get back to its 52-week high set in November. Fourth-quarter earnings in January were mixed, with better than expected profits and slightly weaker than expected sales for the quarter. Verizon will report its next set of quarterly numbers on April 30. VZ trades at $57.65 with an average price target of $60.25.

Coca Cola and Pfizer are Both in the Red

We have only two stocks trading down for the year at this time… Coca Cola (KO) and Pfizer (PFE). Soft drink maker Coca-Cola (KO) is down a modest 2.7%, but that will rise a bit when the company makes its first dividend payment on April 1. KO started off the year on the right foot, but the stock took a big hit following the company’s fourth-quarter report mid-February. Earnings were in-line, and revenue was better than expected, but the stock slid on weak guidance. The stock has found support and stabilized, but so far we have yet to see a meaningful recovery from the February sell off, and shares are likely to remain in a sideways pattern ahead of the company next report on May 16 when the market gets a new update on the company’s underlying business and its updated guidance for the remainder of the year. KO trades at $46.21 with an average price target of $50.00.

Pfizer (PFE) was last year’s second strongest stock. After 2018’s strong gains, the stock has traded sideways since the start of the year, and is now down 3.8% for the year. The company last reported earnings at the end of January and posted positive surprises on both the top and bottom line. PFE has a good valuation, with a forward P/E of 13.6, and earnings are expected to rise 6% per annum over the next five years. Pfizer will report its next set of quarterly numbers on April 30, and if the company is able to top estimates again the stock could break out of its sideways trend and move back into positive territory. PFE trades at $41.97 with an average price target of $45.29.

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