Introducing 2016’s Dogs of the Dow

 

For the third year running, we are going to keep a watch on this year’s Dogs of the Dow, and periodically check in on the group through the year to see how the strategy is holding up.

For those unfamiliar with the Dogs of the Dow strategy, the idea is that you would purchase an equal dollar amount of each of the ten stocks in the Dow Jones with the highest dividend yield, and hold those positions, regardless of how they do, through the entire year.

The idea is that the stocks in the group would not have such a high dividend yield unless the security had dropped into oversold territory. Investors will naturally tend to gravitate towards undervalued securities, so through the course of the year, the stocks with the highest yields are likely to appreciate more than the overall Dow Jones index.

Sometimes the strategy works, sometimes it doesn’t.

The strategy, including dividends, has outperformed the Dow Jones three years running, and during the rocky start to 2016, the strategy is once again rewarding investors.

Through the first, tumultuous week of the year, the Dow Jones fell 6.2%. The stocks in this year’s Dogs of the Dow were also down, but as a group, the stocks were down just 4.4%.

Let’s take a closer look at each of the stocks in this year’s group and how they have fared thus far in the new year.

Verizon

Telecom giant Verizon (VZ) had the largest yield of the stocks in the Dow Jones at the start of the year at 4.98%. Verizon is also in last year’s group, and outperformed the overall market with a gain of 3.5% (including dividends) in 2015. The stock is down, along with the overall market in 2016, but with a loss of just 3.0% it is holding up a lot better than some. I like Verizon, and believe that once the overall market regains its footing, we will see VZ quickly trade back into positive territory. VZ has a P/E of 17.9, with analysts forecasting 1% earnings growth in 2016. If the company can post positive earnings surprises, which it has managed to do the last three quarters, the stock will trend higher, otherwise the stock may wind up tracking fairly closely to the overall market through the year.

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Chart courtesy of www.stockcharts.com

Chevron

Given oil’s sharp fall last year, it should come as no surprise that oil and gas giant Chevron (CVX) vastly underperformed the overall market in 2015. Chevron was a member of last year’s Dogs, and the position lost 16.0% on the year, and the position would have fared even worse were it not for the dividends collected during the year. The good news for investors is that the stock found a little stability during the last three months of the year, and has been trading in a sideways trend since the start of October. Oil will continue to be a volatile sector in 2016, with crude falling 8% in the first three days of the year. As a result, Chevron moved lower, and the stock has lost 8.7% so far on the year. If oil prices firm and trend higher during the year, CVX will erase some recent losses, but until oil gains momentum, CVX will be a weak performer.

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Chart courtesy of www.stockcharts.com

Caterpillar

Caterpillar (CAT) greatly underperformed the market last year, and with the oil and mining sectors facing more problems in 2016, it could be another tough year for the heavy machinery maker. Caterpillar also has exposure in China, were growth concerns will continue to depress the stock moving forward. The stock started the year with a yield of 4.53%, and a low P/E of just 13.0. While the stock’s valuation is definitely attractive, it will not be enough to bring enthusiasm back into the stock until we see stability return to the commodities market, and the dollar weaken a bit. So far the stock is down 6.9% on the year, which puts it basically in-line with the overall market.

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Chart courtesy of www.stockcharts.com

International Business Machines

International Business Machines (IBM) is a new face in this year’s list. The stock closed out the year with a 3.78% dividend yield, ranking it fourth in the Dow Jones for the largest yield. The stock’s yield has risen as shares have steadily fallen since last May, and have yet to show any signs of stability along the way. The stock’s valuation has fallen low enough (it currently has a P/E of 9.27) that we may be close to seeing a bottom, but earnings have been falling, and until the company is able to stop its declining earnings it will be tough for the market to get behind the stock. Analysts forecast a meager 1% earnings growth for 2016 versus 2015, and while that number is low, if the company can hit that number, Wall Street will start to pay attention to the stock and possibly buy into the low valuation. The stock has already fallen 4.4% in 2016, so at this point it is holding up slightly better than the overall Dow Jones, and could see positive territory once the broader market regains its footing.

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Chart courtesy of www.stockcharts.com

Exxon Mobil

Exxon Mobil (XOM) is the second large oil and gas stock in this year’s group. The stock kicked off the year with a 3.75% dividend yield, and while the stock has bounced from its lows last summer, its valuation is still fairly low, with a P/E of 15.8. The entire sector has a pretty low P/E, but Exxon’s valuation is well below the sector average 21.75. The stock has lost 4.2% so far in 2016, which does put it ahead of the overall Dow Jones, but until oil is able to find stability and prices trend higher through the year XOM will find it difficult to outpace the overall market through the course of the year.

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Chart courtesy of www.stockcharts.com

Pfizer

Pharmaceutical giant Pfizer (PFE) was a member of last year’s Dogs of the Dow, and turned out to a solid contributor to the overall group, with the position appreciating 7.2% after adding dividends. While the stock closed out 2015 with a gain, shares have been sliding since last summer, and have lost 4.0% so far in the current year. The healthcare sector has been hot for the last few years, but the drug sector could encounter additional pressure in 2016 as prescription drug costs are likely to be a major talking point in the upcoming presidential election. PFE has a slightly high valuation, with a P/E of 23.2, but the industry average is 26.9, so the valuation alone is not going to hurt the stock moving forward. Analysts forecast modest earnings growth of 7% in 2016 versus 2015, and if the company is able to hit that growth estimate, the stock should, at the least, keep pace with the overall sector, but it may find it tough to outperform the overall market barring a couple big positive earnings surprises.

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Chart courtesy of www.stockcharts.com

Merck

Drug manufacturer Merck (MRK) was a member of last year’s Dogs of the Dow, and the position underperformed the overall Dow Jones, with a loss of 3.8%, which included dividends during the year. The stock has been trending lower since the end of October, and shares have already lost 3.3% in the current year. The stock has a decent valuation, with a P/E of just 13.5, and an attractive 3.48% dividend yield. Analysts do expect modest earnings growth from the company in 2016, but with earnings expected to rise just 5% on a year-over-year basis, the company will need to post positive earnings surprises if shares are going to make any meaningful moves higher. Drug costs will be a major talking point in the upcoming Presidential election, which could keep pressure on the sector through the year.

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Chart courtesy of www.stockcharts.com

Procter & Gamble

Consumer goods leader Procter & Gamble (PG) was not one the Dogs of the Dow in 2015, but it closed the year with a dividend yield of 3.34%, qualifying the stock for entry into this year’s group. The stock closed out last year in a strong upward trend, but shares have not been immune to the early sell off in 2016, and closed the first week of the month down 4.3%, which is basically in-line with the overall Dow Jones. Procter & Gamble is very diversified, and manufactures a lot of consumer staples, which should provide it a lot of stability should the overall market remain volatile this year. The strong dollar presents a problem for Procter & Gamble, as it does with all large multi-national companies, but the company has been doing a good job cutting expenses in order to combat currency headwinds, and I see the stock outperforming the overall market in 2106.

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Chart courtesy of www.stockcharts.com

Wal-Mart

Retail giant Wal-Mart (WMT) is a new face in the list this year. The stock traded steadily lower during the first eleven months of 2015, but shares appear to have hit a bottom and are once again trending in the right direction. The stock has gained 12.9% from its 52-week low set in November, and it is the only stock in the group with a positive gain on the year. WMT shares are up 3.7% in 2016, and if holiday sales figures and the company’s upcoming earnings report on February 18 indicate strength, WMT could make back a lot of last year’s losses in 2016. The year is still early, but at this point Wal-Mart is the standout of the group.

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Chart courtesy of www.stockcharts.com

Cisco Systems

Technology giant Cisco Systems (CSCO) is the final stock in this year’s group, making the cut with a dividend yield of 3.09% at the start of the year. Cisco was not a part of the group last year, and while the stock closed out 2015 in a fairly tight sideways trend, but the stock got hammered to kick off the new year, with shares losing 8.8% through January 8. The stock seems to be trading lower in sympathy with the overall market, and with a P/E of 13.38, and analysts forecasting 29% earnings growth in 2016 versus 2015, I think the stock should easily make back its losses as the overall market regains stability, and I expect shares to outperform during the year as long as the company is able to meet analyst estimates for its quarterly earnings.

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Chart courtesy of www.stockcharts.com

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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