Sunday, February 18

Week 346 - Dogs of the Dow

Situation: It’s that time of year again. You need to think about placing a bet or two on the Dogs of the Dow at the start of each new year. Why? Because that group contains the 10 highest-yielding stocks in the 30-stock Dow Jones Industrial Average (DJIA) and is likely to outperform the DJIA over the next year. The Dogs of the Dow have had a total return of 8.6%/yr since 2000 vs. 6.9% for the DJIA. 

SPOILER ALERT: The 10 highest-yielding DJIA stocks at the end of 2017 includes General Electric (GE), which is likely to be removed from the DJIA before the end of 2018. So, I’ve substituted the next highest-yielding stock, which is Intel (INTC).

Mission: Run our Standard Spreadsheet for the 10 highest-yielding DJIA stocks. Highlight the two members of “The 2 and 8 Club” (CSCO, IBM), as well as the two that would be members if their dividend growth rates were slightly higher, to meet the dividend growth requirement of 8.0%/yr over the past 5 years: Coca-Cola(KO) and Pfizer (PFE). 

Execution: see Table.

Administration: Four of the 10 are gambles (see Column M), likely to lose more than the S&P 500 Index in a future Bear Market: CSCO, INTC, PFE, MRK. Four are worth your attention because of being in (or nearly in) “The 2 and 8 Club”: CSCO, KO, IBM, PFE. It is also important to consider the two integrated oil companies (CVX, XOM) because their stocks are the most rational way for you to gain exposure to the Energy Industry. 

Bottom Line: The Dogs of the Dow strategy calls for buying equal dollar amounts of stock in all 10 companies on the first trading day of the new year. I’m not of that mind, but do know that these 10 companies are “blue chips.” Their valuations haven’t been impressive lately, which accounts for their high dividend yields. DJIA companies are called Blue Chips because they’re thought to be large enough and diversified enough to weather any downturn. Some of the Dogs will outperform the 30-stock DJIA in any given year, but not all of them. My plan is to bet on any Dog in “The 2 and 8 Club” that meets my criteria for brand value and balance sheet stability, which would be Cisco Systems (CSCO). 

GOOD NEWS: All 10 of these companies are projected to beat the DJIA ETF (DIA) over the next decade (see Column Y in the Table), assuming that growth rates for dividends and stock prices hold steady.

Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-cost average into PG, XOM and KO, and also own shares of CSCO, INTC, IBM and PFE.

"The 2 and 8 Club" (CR) 2017 Invest Tune

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Sunday, February 11

Week 345 - Natural Resource Companies in the Vanguard High Dividend Yield ETF

Situation: All natural resource companies have been affected by the 2014-2016 commodities crash. That event was largely driven by the rapid upgrade in commodities production and transportation that was needed to meet demand in China. That supply chain collapsed with the rapid defervescence in Chinese demand, and has only now returned to being in balance worldwide. 

You have to look to the dominant commodity (oil) to understand why the crash was so sudden and deep. Just as Chinese demand was tapering off, new production (from unconventional sources like oil sands and shale) was coming online in North America. Those expensive projects had seemed worthwhile in a world where a barrel of oil was often worth over $100. Oil prices then collapsed when increased production met falling demand. The largest producer (Saudi Arabia) normally would have cut production to keep prices high. But this time the Saudis chose to increase production, hoping to force shale drillers in the United States to give up their costly projects. It didn’t work. American drillers adopted new technology (e.g. horizontal drilling), cut costs, and borrowed heavily to stay in business (even though the price of oil fell to $30/bbl).

Mission: Survey the damage done to strong commodity producers, equipment suppliers, and railroads (which often invest in their main shippers). Stick to companies listed in the US version of the FTSE High Dividend Yield Index, i.e., those in VYM (Vanguard High Dividend Yield ETF).

Execution: see Table.

Administration: We find only 3 Natural Resource-related companies in the Extended Version of “The 2 and 8 Club” (see Week 329): Caterpillar (CAT), Occidental Petroleum (OXY), and Archer Daniels Midland (ADM). We have added 3 more that are in the Vanguard High Dividend Yield Index (VYM) and meet all other requirements for membership in “The 2 and 8 Club” except the requirement that dividend growth be 8%/yr (see Column H in the Table): Norfolk Southern (NSC), Deere (DE), and Exxon Mobil (XOM).

Bottom Line: No matter how you choose to invest in commodities, you’ll be buying into a high-risk asset. You need to monitor positions daily, and have cash available to fund margin calls and attractive developments. Column D summarizes the risks you’ll face (see Table): Even the best companies lose a lot of capital in a commodities crash. And the crash always starts suddenly and goes to unanticipated extremes, leaving all players affected.

Risk Rating: 9 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into XOM and own shares of CAT.

"The 2 and 8 Club" (CR) 2017 Invest Tune

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