Thursday, March 14, 2019

All the Dogs!

Dogs of the Dow is an investment strategy that targets the ten top-yielding stocks in the Dow Jones Industrial Average (DJIA) for investment each year. Popularized by Michael B. O'Higgins in his 1991 book, Beating the Dow, this simple strategy frequently outperforms the DJIA and seems to outperform the index over longer periods of time.

The strategy is based on the idea that blue-chip companies pay consistent (and increasing) dividends, while their stock prices fluctuate based on market conditions. So, if the dividend yield is higher than usual, the stock price likely is lower than usual. Investors following this strategy should reap the benefits of higher yields and above-average stock-price gains.

I don't actively follow the Dogs of the Dow strategy, but I happen to own all the dogs in my DivGro Portfolio.

The Dow Stocks


Dow refers to the Dow Jones Industrial Average, a stock market index created by Charles Dow and named after Dow and one of his business associates, statistician Edward Jones. The index indicates the value of thirty large, publicly owned companies based in the United States. 

The value of the Dow is the sum of the price of one share of stock for each component company, corrected by a factor that is adjusted whenever one of the component stocks split or pays a dividend.

The price-weighted approach of determining the index is problematic, as evidenced this week by the significant impact of just one stock's woes on the index. Boeing (BA) shares closed at $422.60 per share last Friday, March 8, before concerns over the second Boeing 737 crash within five months last Sunday caused the stock to tumble to below $380. For reference, the next highest per share price of a Dow stock is UnitedHealth Group (UNH), which is trading near $250.

Despite these issues, the index remains popular and it provides a snapshot of some of the most influential businesses in the world. 

As mentioned earlier, the Dogs of the Dow strategy looks to invest in the top-yielding Dow stocks. To identify the 2019 Dogs of the Dow, let's look at a dividend yield chart of the Dow's component stocks, as of 1 January 2019:


In the chart, the ten Dow stocks with the highest yields on 1 January 2019 are colored green.

The 2019 Dogs of the Dow


Below is a table of the 2019 Dogs of the Dow. The table shows the dividend yields of these stocks on 1 January 2019 (qualifying yield) as well as the year to date (YTD) performance and the current yield of each stock.

IBM (IBM)
qualifying yield: 5.52%
performance YTD: +21.65%
current yield: 4.65%
ExxonMobil (XOM)
qualifying yield: 4.81%
performance YTD: +17.32%
current yield: 4.15%
Verizon (VZ)
qualifying yield: 4.29%
performance YTD: +2.15%
current yield: 4.26%
Chevron (CVX)
qualifying yield: 4.12%
performance YTD: +13.89%
current yield: 3.91%
Pfizer (PFE)
qualifying yield: 3.30%
performance YTD: –4.40%
current yield: 3.52%
Coca-Cola (KO)
qualifying yield: 3.29%
performance YTD: –2.75%
current yield: 3.57%
JPMorgan Chase (JPM)
qualifying yield: 3.28%
performance YTD: +6.58%
current yield: 3.11%
Procter & Gamble (PG)
qualifying yield: 3.12%
performance YTD: +8.84%
current yield: 2.92%
Cisco Systems (CSCO)
qualifying yield: 3.05%
performance YTD: +20.36%
current yield: 2.74%
Merck (MRK)
qualifying yield: 2.88%
performance YTD: +6.31%
current yield: 2.76%

Year to date, the Dow is up 9.55% and the S&P 500 is up 11.36%.

In comparison, an equal-weighted portfolio of this year's Dogs of the Dow is up 9.00%, slightly lagging the performance of both the Dow and the S&P 500. The main culprits are PFE and KO, though several other Dogs are lagging the market, too, including VZ, JPM, PG, and MRK.

On the other hand, IBM, XOM, CVX, and CSCO easily are outperforming the markets year to date.
It would be interesting to see how these stocks perform during the remaining months of 2019.

The Dogs of the Dow have not outperformed the Dow or the S&P 500 consistently, as can be seen in the following table, courtesy of Money-Zine:

Year
Dogs
Dow
S&P
500
20180.0%-3.7%-4.6%
201719.4%25.1%18.9%
201616.1%13.4%9.5%
2015-1.2%-2.2%-0.9%
20147.0%7.5%11.4%
201330.3%28.1%31.8%
20125.7%7.3%13.4%
201112.2%5.5%0.0%
201015.5%11.0%12.8%
200912.9%18.8%23.5%
2008-41.6%-33.5%-38.5%
2007-1.4%6.4%3.5%
200630.3%19.1%15.8%
2005-5.1%1.7%4.9%
20044.4%5.3%10.9%
200328.7%28.3%28.7%
2002-8.9%-15.0%-22.1%
2001-4.9%-5.4%-11.9%
20006.4%-4.7%-9.2%

In the table, cells with the best performance each year are colored green.

Over the period covered in the table, the Dogs averaged 6.63%, The Dow averaged 6.54%, and the S&P 500 averaged 5.95%. So, indeed, the Dogs seem to do slightly better than the Dow (and the S&P 500, for that matter) over longer periods of time.

The run-up in the stock prices of IBM, CSCO, XOM, and other stocks, have changed their yields significantly. If we selected the Dogs of the Dow today, the picture would be a little different:


Notice that CSCO and MRK both dropped out of the top ten yielding stocks. And entering the top ten are Walgreens Boots Alliance (WBA) and Home Depot (HD). WBA's stock price declined recently, while HD announced a 32% dividend increase.

Valuations


I mentioned earlier that I don't actively follow the Dogs of the Dow strategy, but that I happen to own all the dogs in my portfolio. In fact, I own 23 of the Dow stocks. After all, most Dow stocks are dividend growth stocks of large, well-established and financially sound companies that have operated for decades.

The seven Dow stocks that are not in my portfolio and my reasons for not owning them are:
  • DowDuPont (DWDP) — not an established dividend growth stock
  • United Technologies (UTX) — plans to split into three companies
  • Caterpillar (CAT) — owned previously, but sold due to cyclicality concerns
  • Walmart (WMT) — owned previously, but sold due to anemic dividend growth
  • Goldman Sachs (GS) — tarnished reputation during the financial crisis 
  • American Express (AXP) — poor recession performance and debt level concerns
  • Nike (NKE) — owned previously, but sold to capture 38% profits and due to low yield
For investors interested in owning the 2019 Dogs of the Dow, below is a table with several fair value estimates and price targets, a collated fair value estimate, and an indication of price discount or premium. I'm including the two stocks that now are in the top ten yielding Dow stocks, WMT and HD. To determine the collated fair value, I ignore the lowest and highest estimates and targets, and average the median and the mean of the remaining values:


 IBM 
 XOM 
  VZ  
 CVX 
 PFE 
  KO  
 JPM 
  PG  
 CSCO 
 MRK 

 WBA 
  HD  
Finbox.io
148 
80 
62 
160 
46 
n/a 
94 
83 
48 
86 

86 
139 
Morningstar
158 
90 
58 
136 
46 
49 
111 
98 
49 
75 

73 
170 
SSD
172 
91 
53 
121 
41 
50 
121 
91 
45 
72 

95 
258 
Simply Wall St
156 
67 
106 
280 
80 
53 
107 
106 
46 
98 

125 
202 
TipRanks
150 
86 
62 
136 
49 
51 
118 
96 
55 
87 

72 
204 
Value Line
183 
110 
93 
143 
55 
55 
123 
118 
63 
78 

115 
255 
Yahoo! Finance
140 
84 
59 
137 
44 
50 
116 
98 
55 
86 

74 
203 
CFRA
133 
78 
54 
107 
34 
34 
106 
82 
43 
53 

75 
180 
Fair Value
Estimate
154 
85 
63 
 138 
46 
51 
113 
96 
49 
81 

75 
 180 
Current Price
138 
80 
57 
124 
42 
46 
104 
100 
52 
81 

61 
184 
Discount (–)
Premium (+)
–10.4%
–5.9%
–9.5%
–10.1%
–8.7%
–9.8%
–8.0%
+4.2%
+6.1%
0.0%

–18.7%
+2.2%

Here is a summary of the sources of fair values and target prices used:
  • Finbox.io fair value estimate based on several financial models
  • Morningstarfair value estimate based on discounted cash flow analysis
  • Simply Safe Dividends (SSD) — derived fair value comparing current yield to 5-year average yield
  • Simply Wall Stfuture cash flow value using 2-stage discounted cash flow analysis
  • TipRanks average of analyst price targets
  • Value Lineaverage of target range
  • Yahoo! Financeaverage of analyst price targets
  • CFRAfair value calculation based on CFRA's proprietary quantitative model
Several 2019 Dogs are trading below fair value, with IBM and CVX trading at a discount of at least 10%. Also, KO and VZ are trading at a discount of just less than 10%. Notice, though, that WBA is trading nearly 19% below fair value.

Concluding Remarks


Although I don't actively follow the Dogs of the Dow strategy, I happen to own all ten Dogs and another thirteen Dow stocks. These are quality dividend growth stocks of large, well-established and financially sound companies.

Two stocks, WBA and HD, now have yields that put them in the top ten yielding Dow stocks, replacing CSCO and MRK. In this article, I provided fair value estimates for the Dogs and these two stocks. Several stocks are trading below fair value, providing investors an opportunity to lock in higher yields and the potential of above-average stock-price gains.

Thanks for reading and take care, everybody!

This article first appeared on TalkMarkets on Thursday, March 14, 2019.

Thanks for reading and take care, everybody! 
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2 comments :

  1. Interesting blog you have here, keep it going! :-)

    ReplyDelete
    Replies
    1. Thanks, Bomax -- I appreciate your visit and comment ! Take care and happy investing.

      Delete

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