After a tough start to the year, the Dogs of the Dow overtook the overall market at the end of the summer and with only a handful of weeks left in the year the group has extended its lead on the overall market.
October was a tough month for the overall market. The Dow Jones dipped into negative territory for the year in October, but a short rally at the start of November pushed the index back into positive territory and it is currently holding on to a modest 2.8% gain on the year.
The group of ten stocks making up this year’s Dogs of the Dow are outpacing the market with a gain of 5.9% for the year. If you back out dividends paid by the stocks the gap narrows with the group up just 3.1% which shows just how powerful dividends are in volatile markets.
The Dogs of the Dow strategy is simple. At the start of the year you buy an equal dollar weighted amount of the ten stocks in the Dow Jones with the highest dividend yields. The thinking behind the strategy is the stocks are undervalued which is the reason why the yields are higher than the rest of the stocks in the index.
Yield is always important to investors, and at this time it holds extra importance as interest rates start to rise and investors consider moving money from dividend paying stocks back into fixed-income assets. Stocks with higher dividends will be less vulnerable to the money transfer which makes the Dogs more attractive.
Here is a closer look at this year’s stocks and how they are contributing or hurting the overall group. Note that all gains include dividends that the stocks have made during the year.
Merck and Pfizer lead the pack
The top two performers at this time both happen to be pharmaceutical stocks with Merck (MRK) and Pfizer (PFE) leading the pack. Merck is up 37% on the year while shares of Pfizer have appreciated 26.2%. Both companies have already reported this earnings season, and in both cases the results were mixed with earnings topping estimates while sales fell a little shy of the consensus. The market overlooked the sales misses and both stocks remain strong near their 52-week high. Merck has already made three dividend payments while Pfizer’s third distribution is not due until the first week of December. Investors remain bullish on the sector and see additional upside in both stocks. MRK and PFE are trading at $74.39 and $43.78 with average price targets of $78.39 and $44.89 respectively.
Cisco and Verizon continue to strongly outperform
Cisco (CSCO) and Verizon (VZ) have both shown strength through the year, and the stocks are currently up 24.1% and 18.8% respectively. Verizon has been strong even as weakness hit the overall market while CSCO has managed to maintain a sideways trend over the last month. Verizon posted strong quarterly numbers this earnings cycle, while at the time of writing Cisco has yet to report. The company will report after the market close November 14, with the consensus calling for earnings of $0.72, up from $0.61 during the same period last year. If Cisco is able to top estimates as it has the last four quarters the stock will break out of its sideways trend and resume its upward trend. Both stocks have already made their third distributions for the year. Both stocks have attractive valuations. CSCO trades at $45.70 with a forward P/E of 14 and VZ is at $58.97 with a forward P/E of 12.5. Analysts have average price targets of $51.88 and $57.98 on CSCO and VZ, respectively.
Coca-Cola and Procter & Gamble stay ahead of the market
Both Coca-Cola (KO) and Procter & Gamble (PG) continue to outpace the market. KO is currently up 13.1% and PG is up 6.9%. Both stocks really took off over the last month with strong quarterly reports helping to fuel recent gains. PG was one of the weakest stocks in the group during the first four months of the year, but shares started to rally in May and the stock has appreciated 31% since its May lows. KO has had a similar pattern this year with weakness in the first part of the year and strong gains since early summer. KO has risen 20.5% since its May lows. KO has made three dividend payments this year while PG has already paid out all four of its dividends. KO trades at $49.76 with an average price target of $50.73, while PG is trading at $93.02 with an average price target of $89.35.
Exxon and Chevron hover near break-even for the year
Oil giants Exxon Mobil (XOM) and Chevron (CVX) are trading near break even for the year. XOM is up a modest 0.4% while CVX is currently down 1.7% on the year. Oil prices have been strong most of the year, but crude prices have eased over the last month and CVX and XOM have both declined as a result. Both stocks have already reported this earnings season. XOM topped estimates on both the top and bottom line, while CVX posted mixed results with weaker than expected sales. Analysts see a significant amount of upside in both stocks. XOM and CVX are trading at $79.50 and $117.71 with average price targets of $92.91 and $147, respectively. Both stocks have made three dividend payments during the year.
IBM and General Electric showing big losses for the year
International Business Machines (IBM) and General Electric (GE) are major losers for the year. IBM shares are down 16% year to date while GE shares have lost 51% of their value. Sentiment remains very bearish on both stocks with each trading in the low end of their 52-week range. IBM has struggled to grow its cloud business and recently announced a huge $34 billion deal to buy cloud player RedHat, which was a 63% premium over the stock’s valuation at the time of the announcement. Long term the acquisition could pay off for the company, but Wall Street will need to see positive results for enthusiasm to return to the stock. GE has been weak all year and its downward trend accelerated following a big quarterly miss at the end of October. Earnings are falling, and are expected to fall by 31% for the full year. It will be tough for enthusiasm to return to the stock until GE is able to start showing an ability to grow profits. IBM trades at $121.73 with a $162.44 average price target. GE has an average price target of $13.20 and the stock is currently trading at $8.65.