After a spectacular performance in 2014, during which it gained more than 8%, the Dow (DIA) has just completed a dismal year. The blue chip index lost 2.3%, suffering its worst year since 2008 when it nosedived 30%. This was in keeping with the broader markets, except biotech and tech stocks. A notable exception was another Dow component, Apple Inc. (AAPL - Analyst Report), which declined 4.5% in 2015.
Most of the index’s losses can be attributed to losses made between June and September. These reverses are attributable to concerns over several national and international developments. Greece’s debt negotiations, weakness in China’s economy and uncertainty over the timing of a Fed rate hike figure prominently among these events.
Despite such a bad year for the index, a report from market research company Bespoke Investment Group says that the Dogs of the Dow have experienced good times. This dividend-centric strategy has yielded good results and investors would do well to focus on stocks picked using this approach.
Major Factors Influencing Markets
The three biggest factors influencing markets last year were the Fed rate hike, China’s economic weaknesses and the continuing oil price slump. The central bank had started providing clear indications that it would raise rates following an improvement in economic indicators, particularly on the employment front. However, investors remained edgy about the timing of such a move, leading to losses for the broader markets.
Meanwhile, the continuing decline in oil prices hampered investors for most of the year. This is primarily due to a widening demand supply gap. China’s flagging economy has led to a decline in demand for oil. Additionally, major suppliers including OPEC have refused to reduce output despite these developments.
Last month, OPEC decided not to cut oil output at a meeting in Vienna. Instead it raised its production ceiling, taking U.S. crude price further below the $40-per-barrel mark.
The economic situation in China guided markets to a significant extent in 2015. Almost all economic reports were dismal in nature through the year. Markets soared during the first half before slumping over a two and a half month period. Reforms and support measures have been undertaken to boost the financial markets and the economy. Meanwhile, the country’s leadership has said that it is ready to accept a slower rate of growth.
Dogs of the Dow
Dogs of the Dow, an investment strategy popularized by Michael B. O'Higgins in 1991, has been the darling of yield-seeking investors as it guarantees steady return irrespective of market conditions. How does that happen?
The Dogs of the Dow are essentially the top 10 dividend-paying blue-chip stocks of Dow Jones Industrial Average (DJIA). The built-in dividend income strength and good reputation of these companies ensure a strong price appreciation. But their high dividend is the key attraction.
High dividend yields suggest that these stocks are in the oversold territory and will rebound faster than any other stock when the business cycle changes. This would result in higher capital appreciation over the one-year period along with juicy yields.
From 1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging an annual return of 14.3%, compared to 11% for the Dow. The performance between 1973 and 1996 was even more impressive, as the Dogs returned 20.3% annually, while the Dow produced a 15.8% return.
In 2013, the Dogs provided an average yield of 3.6%, compared to 2.6% for the DJIA. The average yield of the Dogs exceeds that of the DJIA by nearly the same margin this year.
Classic Strategy Worked in 2015
According to Bespoke Investment Group, this strategy has worked well last year after offering mixed results in 2014. The Dogs of the Dow provided a return of 2.6% in 2015 after including income from dividends. This is significantly better than the 0.2% increase for the index as a whole. Such returns also exceed the 2.4% increase provided by the S&P 500.
Going forward, it is likely that these stocks will continue to be a good bet. As the domestic economy strengthens further, markets are likely to move upward. The Dow has gained 5.8% over the last quarter. Indications of more economic stimulus programs in the Eurozone and China helped benchmarks to end in positive territory during this period.
As the Dogs rebound and the market discovers their true value, they can be sold and replaced with other stocks. Meanwhile, they will continue to provide handsome returns because of their strong dividend yields.
5 High Yielding Dow Stocks
Below we present five stocks from the Dow with the highest dividend yields, each of which also has a favourable Zacks Rank.
Chevron Corporation’s (CVX - Analyst Report) current oil and gas development project pipeline is among the best in the industry, boasting large, multi-year projects. Despite the ongoing oil price slump, Chevron possesses one of the healthiest balance sheets among its peers. This helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
Chevron has a Zacks Rank #3 (Hold) and a dividend yield of 4.8%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 25.62.
IBM Corporation’s (IBM - Analyst Report) third-quarter 2015 results were mixed in nature. Despite these reverses, IBM’s investments in cloud computing, Big Data, mobile and security, and the divestitures of its loss-making units ensure long-term profitability.
IBM has a Zacks Rank #3 (Hold) and a dividend yield of 3.8%. It has a P/E (F1) of 9.25.
Exxon Mobil Corporation’s (XOM - Analyst Report) third-quarter 2015 earnings beat the Zacks Consensus Estimate. A resilient integrated business model enabled the energy behemoth to beat estimates in the current environment of relentlessly falling commodity prices. With the commencement of various projects, 2016 is likely to be a better year for the company.
Exxon Mobil has a Zacks Rank #3 (Hold) and a dividend yield of 3.8%. It has a P/E (F1) of 19.69.
Merck & Co. Inc.’s (MRK - Analyst Report) third quarter earnings were better than expected, despite the presence of headwinds like generic competition and unfavorable currency movement. Moreover, the company raised its earnings outlook for 2015. Merck is likely to continue introduce cost-cutting initiatives and share buybacks to drive the bottom-line.
Merck has a Zacks Rank #3 (Hold) and a dividend yield of 3.5%. It has a P/E (F1) of 14.81.
Pfizer Inc.’s (PFE - Analyst Report) third quarter results surpassed expectations on all fronts with the company raising its outlook yet again. Core products and new products like Ibrance should drive revenues. Meanwhile, the Hospira acquisition has significantly expanded Pfizer's sterile injectable and biosimilar capabilities.
Pfizer has a Zacks Rank #3 (Hold) and a dividend yield of 3.5%. It has a P/E (F1) of 14.81.
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