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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