Dogs of the Dow beat the market in 2015


For the third straight year, the Dogs of the Dow strategy outperformed the overall Dow Jones in 2015.

For those readers unfamiliar with the Dogs of the Dow strategy, the basic idea of the strategy is that you  acquire an equal dollar amount of each of the top ten yielding stocks at the start of the year, and hold them, regardless of performance, for the entire year. The reasoning behind the strategy is pretty simple, the top ten yielding stocks have yields that are so high because the underlying security has fallen into oversold territory and should appreciate faster than the overall market moving forward.

It was a volatile year for oil prices, and as a result both Chevron (CVX) and Exxon Mobil (XOM) had tough years and pulled the group lower. Another disappointing holding was Caterpillar (CAT), as weakness in the mining sector continued to impact the heavy machinery maker.

Outliers to the upside included fast food maker McDonald’s (MCD) and conglomerate General Electric (GE), both of which appreciated in the upper 20 percent range.

Collectively, the group had a positive 2.5% return for the year (including dividends), while the Dow Jones as a whole lost 2.23% for the year.

Throughout the year we periodically checked in on 2015’s Dogs of the Dow, and before we turn our attention to 2016’s group, let’s review how each of the ten stocks performed last year, and how the picture looks for each stock as of the end of the year.

Check back next week when we look at the stock’s making up 2016’s Dogs of the Dow, which will include new stocks International Business Machines (IBM), Procter & Gamble (PG), Wal-Mart (WMT) and Cisco (CSCO).


At the start of 2015, telecom giant AT&T (T) was the top yielding stock in the Dow Jones, with a yield of 5.48%. With the high yield at the start of the year, T was including in the 2015 Dogs of the Dow, but the security was removed from the Dow Jones in March, replaced with tech-titan Apple Inc. (AAPL). Because the stock was a part of the group at the start of the year, the position was held throughout 2016. The stock was a positive influence on the group, with the position appreciating 8.0%, including dividends, making it the third-best position in the group. Analysts forecast earnings to grow at a modest 5% pace in 2016, and with a price-to-earnings ratio of 36.2. The high P/E, in tandem with the low earnings growth estimate could keep the stock from enjoying another market-beating year in 2016.


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Verizon (VZ) enjoyed a modest gain on the year, with the position appreciating 3.5% with dividends. In most years, investors would want more return on their money, but with the overall Dow Jones falling 2.2%, the small gain was good enough to pacify shareholders. Verizon closed out the year trending higher, with a dividend yield of 4.89%. The stock has a P/E of 18.2, which is basically in-line with the overall industry, and analysts forecast meager earnings growth of just 0.3% in 2016. Given the valuation and the low earnings growth forecast, I do not see a huge amount of upside potential for the stock during the year. As long as the stock is able to hit its earnings estimates, the stock should track the overall market, but do not expect huge gains for VZ in 2016.


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Oil and gas giant Chevron (CVX) closed out the year with a 16.0% loss. Without dividends, the loss would have been much worse, at 19.8%. CVX is a perfect example of the power of dividends, and with the stock closing out the year with a yield of 4.76%, the stock will be the second highest yielding stock in 2016’s Dogs of the Dow. Oil prices will most likely remain depressed through the upcoming year, but there doesn’t appear to much additional downside risk for oil. As such, Chevron stock has been pretty stable over the last couple of months. The stock has a decent valuation, with a P/E of 19.5, and I think the stock will track much closer to the overall index in 2016. I would not look for a huge breakout year, barring any major announcements of supply cuts or spikes in demand, but oil stocks should remain fairly stable at their current levels, and I expect CVX to track the overall Dow fairly closely.


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Fast food giant McDonald’s (MCD) closed out the year as the top-performing stock of the group, with the position appreciating 29.% including dividends. The stock enjoyed solid gains through the final four months of the year, fueled in part by rising sales at the company’s U.S. restaurants. With the stock’s solid performance during the year, MCD closed out the year with a dividend yield of 3.01%, and as such it will not be included in 2016’s Dogs of the Dow. The stock’s valuation has risen to a P/E of 25.6, with analysts forecasting earnings growth of 9% in 2016 versus 2015. With the positive earnings growth forecast, I see additional upside for the stock during the year, but would not expect another breakout year like the one the stock enjoyed in 2015.


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Drug manufacturer Pfizer (PFE) closed out the year in a downward trend, but including dividends the position was able to enjoy a 7.2% gain during the year. PFE now has a dividend yield of 3.72%, and as such will be included in the group for 2016. The stock currently trades at $31.75, and analysts have an average price target of $40.44, which represents 27.3% upside potential. The stock has a P/E of 23.7, which is slightly lower than the 27.3 sector average, and analysts forecast earnings growth of 7% during the current year. I am bullish on the healthcare sector, and if PFE is able to hit analysts’ estimates for its earnings growth, shares should be able to outpace the overall market again in 2016.


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General Electric

Conglomerate General Electric (GE) had a breakout year in 2015, with the position appreciating 26.9% during the year, including dividends. The stock has performed well, as investors show optimism over the company’s move away from the financial sector. The company’s financial segment caused it major problems during the recession, and it has announced plans to sell off the vast majority of its $500 billion worth of assets moving forward. After eliminating its risky financial business, analysts believe GE will be able to better focus on growing its domestic and international core industrial products segments, which will drive the stock moving forward. With the position appreciating 26.9% during the year, the yield has fallen to 2.95%, and the stock is no longer a Dog of the Dow.


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Pharmaceutical company Merck (MRK) ended the year in negative territory, but including dividends the position only closed out the year down 3.8%. While the stock underperformed the overall market, the stock was stable during the final two months of the year, and could be a decent performer in 2016. MRK has a low P/E of 13.8, and analysts forecast earnings growth of 5% during the year. On average, analysts have a $62.26 price target on the stock, which represents 19.9% upside from its current trading price. As long as the company is able to keep pace with its earnings estimates I see upside to the stock and believe it will outperform the market in 2016.


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Heavy machinery maker Caterpillar (CAT) was the worst performing stock in the group. The position lost 22.5% during the year, and excluding dividends, CAT was down 25.8% in 2015. The stock closed out the year with a 4.53% dividend yield, earning it a position in the 2016 group of stocks. The stock has been trending lower since early summer, and there is a good chance that 2016 will be another disappointing year for the stock. The company has been hit from multiple fronts, with weakness in the energy sector, the mining sector and its construction and infrastructure sectors have also been weak. Commodities are expected to remain under pressure through at least the first half of 2016, which will keep the stock from finally turning the corner and bringing relief to shareholders that have endured a tough few years. To keep with the Dogs of the Dow strategy you have to stay in the stock but I expect it will be another underperforming year for the stock, with analysts forecasting earnings to fall 21% during the year.


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Exxon Mobil

Exxon Mobil (XOM) closed out the year down 15.7%, but with dividend included, the position lost just 12.6%. But all things considered, with oil as weak as it has been, things could have turned out much worse for XOM in 2015. Oil is hovering around recession-era levels, and while I see little catalyst to drive prices higher during at least the first half of the year, I do not see much additional downside risk either. XOM shares have held up pretty well over the last three months considering oil’s weakness, and with a P/E ratio of just 16.3, I do not think there is a lot of downside risk. If oil remains stable, XOM shareholders are probably in store for modest gains in the stock, but if oil is able to rebound during the summer and latter part of the year, the stock has a lot of upside potential. XOM closed the year with a 3.75% dividend yield, and will remain in the group for 2016.


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Soft drink leader Coca-Cola (KO) managed to squeeze out a modest 4.9% gain on the year with dividends. The stock closed out the year with a 3.07% dividend yield, slightly under Cisco’s (CSCO) 3.09% yield, and knocking it out of the group for 2016. Analysts are expecting modest 4% earnings growth for the company in 2016, which combined with a P/E of 27.4 could lead to another year of low returns. The company has high international exposure, and if the Federal Reserve’s latest move to boost interest rates results in an even stronger dollar, KO earnings may fail to live up to expectations. Coca-Cola is a solid company, but as long as the dollar is strong, earnings will suffer and I would look for better value elsewhere.


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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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