Category Archives: dog of the dow

The Intelligent Investor: 5-Year DJIA

Chapter 7 of The Intelligent Investor by Benjamin Graham offers up a “Portfolio Policy for the Enterprising Investors: The Positive Side.”  In this chapter, there is mention of “The Relatively Unpopular Large Company” which is essentially a Dogs of the Dow investment strategy.  Unlike the Dogs of the Dow, this approach does not focus on the highest yielding stocks in the Dow Jones Industrial Average.

The distinction of this strategy is the fact that it is based on the selection of the ten Dow Jones Industrial Average stocks with the lowest price to earnings (p/e) ratio.  This group is contrasted with the performance of the 10 highest p/e ratio stocks and the entire index.  The performance measures the price change over 5-year periods from 1937-1969 as shown below with our own 1-year comparison from November 4, 2016 to October 10, 2017.

Review: DJIA Analyst Review

In our posting of October 22, 2016, we highlighted the Analyst Estimates for the Dow Jones Industrial Average.  We took the analyst low estimated earnings and with a price to earnings ratio of 15 projected one year out. Below are the estimated returns and the actual returns as of September 29, 2017.

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In our assessment of October 22, 2016, we had proposed the following outcomes to watch for:

  • “We believe that the average category provides the best return overall with the high risk group offering exceptional gains for aggressive investors who have a longer time horizon (3-7 years).”

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In the category indicated as “high risk” the estimate by analysts suggested that the group would decline by more than –24.02%.  However, instead of falling, the high risk group has gained as much as +21.32%.  The “average return” group nearly doubled the expected return as determined by analysts.  Finally, the group indicated as “high expectations” gained half as much as the analysts had indicated based on the projected earnings with a price multiple of 15 times.

  • Our “NLO dogs” of the Dow would “…produce surprising numbers as compared to the way the conventional ‘dogs’  would perform .”

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As outlined in the graph above, the projected return of the “NLO dogs” increased by +17.29% instead of declining –13.30%.  However, that exceptional reversal of fortune was not enough to meet our goal of the “NLO dogs” beating the traditional “Dogs of the Dow” investment strategy.

Thoughts

While there are three weeks remaining for the final 1-year numbers to come in, we’ve had some mixed results with our forecasts on expected returns.  Overall, the selection of companies in the most widely followed index should have similar outcome as outlined in 2016. 

Those stocks that are expected to perform the worst will exceed the prescribed returns while those expected to outperform will generally underperform analyst expectations.  We hope to follow up on the overall performance of the “high risk” group to see if the 3-7 year performance manages to hold up to our expectations.

Regarding the “Dogs” investment strategy, while it is nice for the stocks that we selected to exceed the performance of the analysts, the original theory seems to remain consistent, at least in the period from 2016 to 2017. 

Dogs of the Dow – A Look Back at 2016 & Forward to 2017

The term a "rising tide lifts all boats" was certainly fitting for 2016. The bull market raged on bringing most investment strategies, except for shorts, into the black.

One should expect to see a good deal of profits from the past "Dogs of the Dow" and "Dogs of NLO" strategy. We truly enjoy keeping track and assessing various strategies. What we did several years ago was introduced our readers to a strategy we termed "Dogs of NLO" which looked at the top 10 Dow Jones Industrial Average stocks that are closest to their yearly low. Contrast that to the conventional "Dogs of the Dow" which focus solely on the high yielding stocks.

Our argument is that these companies are typically clustered into several industries that has high payout ratio while leaving other companies out. As value investors, we put heavy focus on relative value versus absolute yield. That being said, we return to 2013 where we introduced the strategy.

To our surprise, the 10 companies in "Dogs of NLO" outperformed the traditional strategy by +16%. The average annual return for our strategy was +15.8% compared to 11.7%. The table below highlight the breakdown between price performance and yield-on-cost.

Dog_of_NLO

Dogs of the Dow 2013
Ticker Company Beginning of 2013 Price End of 2016 Price 2012 - 2016 % Chg Current Yield on Cost
T AT&T, Inc.         33.7         42.5 26.4% 5.8%
VZ Verizon         43.5         53.4 22.8% 5.3%
INTC Intel         20.5         36.3 76.8% 5.1%
MRK Merck         41.2         58.9 42.9% 4.6%
HPQ Hewlett-Packard         14.0         14.8 5.7% 3.8%
DD E. I. du Pont         45.1         73.4 62.9% 3.4%
PFE Pfizer Inc.         25.1         32.5 29.2% 5.1%
GE General Electric         20.7         31.6 52.7% 4.6%
JNJ Johnson & Johnson         70.1       115.2 64.4% 4.6%
MCD McDonald's         88.7       121.7 37.2% 4.2%
  Dog of the Dow Average   42.09% 4.65%
Dogs of the NLO 2013
Ticker Company Beginning of 2013 Price End of 2016 Price 2012 - 2016 % Chg Current Yield on Cost
MSFT Microsoft         27.0         62.1 130.5% 5.8%
MCD McDonald's         88.7       121.7 37.2% 4.2%
INTC Intel         20.5         36.3 76.8% 5.1%
DD E. I. du Pont         45.1         73.4 62.9% 3.4%
AA Alcoa         20.0         28.1 40.4% 1.8%
IBM IBM       192.7       166.0 -13.9% 2.9%
UNH UnitedHealth         54.4       160.0 194.0% 4.6%
KO Coca-Cola         36.4         41.5 13.8% 3.8%
MRK Merck         41.2         58.9 42.9% 4.6%
CAT Caterpillar         87.7         92.7 5.8% 3.5%
  Dog of the NLO Average   59.04% 3.97%

Although we would welcome +46.70% return of "Dogs of the Dow" strategy, we can't ignore the performance of our strategy which pulled in +63% total return.

One interesting observation was the relatively low dividend yield for "Dogs of NLO" in 2013 (2.90%) compared to the Dow (4%). However, by the end of this year, the yield for our strategy is not too far behind. We won't attempt to dissect the driver for this outperformance as it would be foolish for us to do so.

Now, let's explore the list published last year. The performance of our list was on par with the traditional strategy. There's only one way to find out the viability of this strategy and that's to revisit it several years from now.

Dog_of_NLO_2016

Dogs of the Dow and NLO for 2017 Continue reading

Analyst Estimates: Dow Jones Industrial Average

Below are the price projections based on analyst earnings estimates for the Dow Jones Industrial Average as of October 22, 2016. These estimates project the price change for the respective stocks over the next 12 months and the risk profiles associated with the estimates.  We also propose a variation of the “Dogs of the Dow” theme for future analysis.

2016 Dogs of the TSX

In our most recent article on “Dogs of the Dow: A Look Back at 2015 & Forward to 2016”, we highlighted the stocks that are part of the Dow Jones Industrial Average that “…an investor annually select[s] for investment the ten Dow Jones Industrial Average stocks whose dividend is the highest fraction of their price [dividend yield] (wikipedia).”

Within the context of this concept, picking the ten highest yielding stocks of the Dow Jones Industrial Average, there is an important qualitative element that is implied by using the Dow.  Michael O’Higgins, author of the 1991 book Beating the Dow which outlined the idea later called “Dogs of the Dow”, said the following of the blue chip index:

“As the most popular indicator of market activity, the Dow is itself an influential barometer of the market and economic conditions. Individually, the 30 stocks that make up the Dow industrials are among the most widely held, widely analyzed, and widely publicized in the world. They are also among the biggest and the strongest. Combined, the 30 Dow components have assets of around 2.5 trillion dollars, nearly five million employees, and sales that exceed the gross national product of every country in the world except China, Germany, India, Japan and the United States.

“These prime companies may gain, lose, spin off, acquire, merge, rename themselves, reorganize, even drop out of the Dow, but they are an integral and vital part of our economic system, and in one form or another they are here to stay.

“The Dow companies and their products and services are household names to most people.”

The very fact that the companies from the Dow Industrials is limited to only 30 widely followed companies is what makes the concept “work”.  This strategy for investing gets extremely thin on performance when applied to the S&P 500 or any other “broad” index.  Part of the reason for this is the fact that some companies that are part of the S&P 500 Index aren’t at a “blue chip” status, yet.  Therefore, the whole point of using the Dow Jones Industrial Average is to isolate the best companies to invest in regardless of the market conditions.  Concerns regarding diversification are addressed here.

Understanding the above commentary about why the Dow Industrials are used, we are now going to apply the same concept to three different categories of stocks within the Toronto Stock Exchange Composite Index.

Continue reading

Dogs of the Dow – A Look Back at 2015 & Forward to 2016

The volatile 2015 has come to a close and we're back to review the viable strategy known as "Dogs of the Dow". At this point, the history of this strategy can be found all over the internet. However, we will review the 2015 performed as well as display what 10 stocks one would consider for this strategy.

Dog of the Dow 2015
Ticker Company Beginning of 2015 Price End of 2015 Price Dividend  Yield (1/1/2015) Dividend Yield (12/31/2015) YTD % Chg
T AT&T, Inc.       33.59            34.4 5.5% 5.6% 2.4%
VZ Verizon Communications
      46.78            46.2 4.6% 4.9% -1.2%
CVX Chevron Corporation     112.18            90.0 3.8% 4.8% -19.8%
GE General Electric Company       25.27            31.2 3.5% 3.0% 23.3%
MCD McDonald's Corp.       93.70          118.1 3.5% 3.0% 26.1%
PFE Pfizer Inc.       31.15            32.3 3.3% 3.7% 3.6%
MRK Merck & Co. Inc.       56.79            52.8 3.1% 3.5% -7.0%
XOM Exxon Mobil Corporation       92.45            78.0 2.9% 3.7% -15.7%
KO The Coca-Cola Company       42.22            43.0 2.9% 3.1% 1.8%
CAT Caterpillar Inc.       91.53            68.0 2.8% 4.5% -25.8%
  Dog of the Dow Average     3.59% 3.97% -1.23%
S&P 500 2,058.90 2,043.94 -0.7%
Dow Jones Industrial Average 17,823.07 17,425.03 -2.2%

The average return from the Dogs were -1.23% which was worse than the S&P 500 (-0.7%) but better than the Dow Jones Industrial (-2.2%). The best performer was McDonald's (MCD) (26.1%) and biggest decline came from Caterpillar (CAT) (-25.8%). It is a second consecutive years that this strategy lagged the market. One statistic we do not see is the rate of increase on the dividend. In 2014, average dividend yield rose by 1.8%. The dog of 2015 started the year with yield of 3.59% and ended the year at 3.85%, an increase of 7.3%. This statistic is impressive given our low rate environment.

The big question on everyone's mind is, does this strategy work?  We don’t pretend to know the answer to that as there is no single strategy that will work consistently.  However, we believe that the "Dogs of the Dow" has its place. The strategy worked once (in 2013) over the past 4 years and buying the market (S&P 500) would have yielded better result.  That being said, the strategy might be fitting for income investor who are capable and willing to withstand the volatility in the market.

What’s In Store for 2016?

We will reiterate that NLO team do not have a strong view on the strategy and tracking it is simply an opportunity to study in hope that we learn something along the way.  The table below highlights 10 companies that are consider the Dog of the Dow for 2016.

Dog of the Dow 2016
Ticker Company Beginning of 2016 Price Dividend  Yield (12/31/2015)
VZ Verizon Communications
      46.22 4.9%
CVX Chevron Corporation       89.96 4.8%
CAT Caterpillar Inc.       67.96 4.5%
IBM IBM     137.62 3.8%
XOM Exxon Mobil Corporation       77.95 3.7%
PFE Pfizer Inc.       32.28 3.7%
MRK Merck & Co. Inc.       52.82 3.5%
PG Procter & Gamble Company       79.41 3.3%
WMT Wal-Mart Stores Inc.       61.30 3.2%
CSCO Cisco Systems, Inc.       27.16 3.1%
  Dog of the Dow Average   3.85%
S&P 500 2,043.94
Dow Jones Industrial Average 17,425.03

Alternative Strategy

One thing to note as you filter through the 2016 list is that there are sectors that will likely payout higher portion of their net income in dividend (i.e. Utilities, Telecom, Consumers). As such, we often see the same companies show up on this list (Verizon, Pfizer). Companies with low payout ratio never appears on the list (American Express, Goldman Sachs). As such, we offer alternative list call 'Dogs of NLO' back in 2013.  The premise of this alternative view is to assess the 10 companies that were trading near its yearly low rather than highest dividend yield.  Three years gone and our dogs have out performed the traditional one by 8%.  Since the start of 2013, the average return was 38% which trailed the market (39%) and outstrip the conventional Dogs of the Dow (29.5%).   The biggest driver to this success may be from the rise in dividend yield.  Assessing yield based on original cost, one will find that yield rose faster from our alternative strategy (see table below).

Strategy Beginning of 2013 Yield 2015 Yield1 % Change
Dog of the Dow 4.07% 4.45% 9.37%
Dog of NLO 2.92% 3.68% 26.14%
1 - Yield on cost (current dividend / original cost)

By no mean do we believe our strategy to be a better one, but it is to offer readers a different view.  Below are the our Dogs of the NLO for 2016.  Let’s come back a year (or two) from now to assess the viability of this strategy.

Dog of NLO 2016
Ticker Company Beginning of 2016 Price Dividend  Yield (12/31/2015)
AXP American Express Company       69.55 1.7%
IBM IBM     137.62 3.8%
GS The Goldman Sachs Group
    180.23 1.4%
CAT Caterpillar Inc.       67.96 4.5%
WMT Wal-Mart Stores Inc.       61.30 3.2%
UTX United Technologies Corporation       96.07 2.7%
MMM 3M Company     150.64 2.7%
PFE Pfizer Inc.       32.28 3.7%
AAPL Apple Inc.     105.26 2.0%
MRK Merck & Co. Inc.       52.82 3.5%
  Dog of NLO Average   2.92%
S&P 500 2,043.94
Dow Jones Industrial Average 17,425.03

Dogs of the Dow – A Look Back at 2014 & Forward to 2015

As the year 2014 comes to an end, we can't help but review a strategy known as The "Dogs of the Dow" which suggests that investors buy the top ten highest yielding stocks from the Dow Jones Industrial Average at the beginning of the year. The table below highlights the performance of the 2014 "Dogs of the Dow."

Dog of the Dow 2014

Ticker Company Beginning of 2014 Price End of 2014 Price Dividend  Yield (1/1/2014) Dividend Yield (12/31/2014) YTD % Chg
T AT&T, Inc.  35.16    33.6 5.2% 5.5% -4.5%
VZ Verizon Communications Inc.  49.14    46.8 4.3% 4.6% -4.8%
MRK Merck & Co. Inc.  50.05    56.8 3.5% 3.1% 13.5%
INTC Intel Corporation  25.96    36.3 3.5% 2.5% 39.8%
PFE Pfizer Inc.  30.63    31.2 3.4% 3.3% 1.7%
MCD McDonald's Corp.  97.03    93.7 3.3% 3.5% -3.4%
CVX Chevron Corporation 124.91  112.2 3.2% 3.8% -10.2%
GE General Electric Company  28.03    25.3 3.1% 3.5% -9.8%
CSCO Cisco Systems, Inc.  22.43    27.8 3.0% 2.7% 24.0%
MSFT Microsoft Corporation  37.41    46.5 3.0% 2.5% 24.2%
  Dog of the Dow Average     3.56% 3.49% 7.04%
S&P 500 1831.98 2058.9 12.39%
Dow Jones Industrial Average 16441.35 17823.07 8.40%

The overall performance of the group was subpar when compared to the S&P 500 but nearly matched the performance of the Dow Jones Industrial Average.

Looking at the subgroup, within the top ten highest yielding stocks, you can clearly see that the big name technology companies outperformed the market, with Intel (INTC) gaining as much as +40%. Not only was Intel the best performer in the group but it was also the best performer in the entire index.

Cisco (CSCO) and Microsoft (MSFT) also had exceptional gains for the year, excluding dividend, of +24%. The worst performing was Chevron (CVX) which was hit by the large declines in the price of oil.

Looking broadly at the index, it was the energy sector and large industrial companies such as General Electric (GE) that was hit the hardest. Large telecoms like AT&T (T) and Verizon (VZ) didn't do as well but their large dividends provided enough of a buffer that the total return was in positive territory.

While we don't have a strong view of the strategy, whether it works or not, we are often curious about the actual performance of other strategies. As such, the table below highlight the 10 companies that are consider the Dogs of the Dow for 2015.

Ticker Company Beginning of 2015 Price Dividend  Yield (1/1/2015)
T AT&T, Inc.  33.59 5.5%
VZ Verizon Communications Inc.  46.78 4.6%
CVX Chevron Corporation 112.18 3.8%
GE General Electric Company  25.27 3.5%
MCD McDonald's Corp.  93.70 3.5%
PFE Pfizer Inc.  31.15 3.3%
MRK Merck & Co. Inc.  56.79 3.1%
XOM Exxon Mobil Corporation  92.45 2.9%
KO The Coca-Cola Company  42.22 2.9%
CAT Caterpillar Inc.  91.53 2.8%
  Dog of the Dow Average   3.59%

It shouldn't surprise anyone that many companies which appeared on the 2014 list are also in the 2015 list. Interestingly, this list consists of various sectors. The telecom sector generally has the largest payout of dividends which put AT&T (T) and Verizon (VZ) on the list by default.

The energy sector has two companies, Chevron (CVX) and Exxon (XOM). Sectors that rely heavily on consumer discretionary spending are McDonald's (MCD) and Coca-Cola (KO). If you believe in big pharma, look no further than Pfizer (PFE) and Merck (MRK). Last but not least are the large industrial names which are pegged to world growth, Caterpillar (CAT) and General Electric (GE).

It seems that investors can select a winner based on the sector that they believe to be the top "theme" for 2015 but a study of what has worked in 2014 may provide some edge to how one can maximize the use of this list.

Technology companies obviously did extremely well in 2014 and if you look back the normal dividend yield for the sector, you would see that they're in the range of 2.0% - 2.5% yield. At the beginning of 2014, Intel was yielding 3.5%, Microsoft and Cisco both yield 3.0%.

Clearly all companies were trading much higher than their historical average yield. As for the strategy highlighted in Dividend Don't Lie by Geraldine Weiss, we should really look at the relative yield rather than the absolute yield when assessing the valuation of a company.

Dogs of the Dow – A Look Back at 2012 & Forward to 2013

The new year is right around the corner and we’re not letting the fiscal cliff stop us from searching for investment ideas.  We've decided to turn to an old strategy, the Dogs of the Dow which was introduced by Michael O’Higgins, for some potential opportunities.  The Dogs of the Dow strategy suggests that you buy the top ten highest yielding stocks of the Dow Jones Industrial Average at the beginning of  each year.

Below is the performance of the "Dogs" for 2012.

Ticker Company 2012 Price Current Price 2012 Yield Current Yield YTD % Chg
T AT&T, Inc.                 30.5                 33.7 5.8% 5.3% 10.5%
VZ Verizon                 40.3                 43.5 5.0% 4.7% 7.9%
KRFT Kraft Foods                 38.0                 44.4 4.8% 4.4% 17.0%
MRK Merck                 37.9                 41.2 4.5% 4.2% 8.8%
PFE Pfizer Inc.                 21.9                 25.1 4.1% 3.8% 15.0%
GE General Electric                 18.2                 20.7 3.8% 3.7% 13.5%
DD Dupont                 46.6                 45.1 3.6% 3.8% -3.2%
JNJ Johnson & Johnson                 65.6                 70.1 3.5% 3.5% 6.9%
INTC Intel Corporation                 24.6                 20.5 3.5% 4.4% -16.7%
PG Procter & Gamble                 66.3                 68.0 3.2% 3.3% 2.5%
  Dogs of the Dow     4.16% 4.11% 6.21%

The top 10 highest yielding companies of the Dow averaged a return of +6.2% compared to the S&P 500 gain of +12.7% and our NLO portfolio gain of +7.4%.  The biggest laggard of the group was Intel (INTC) which is one of our top holdings, down -9% since our purchase.  Additionally, it should be noticed that Kraft Foods (KRFT) is no longer a component of the Dow Jones Industrial Average but has been the best performer of all ten companies.  As pointed out in our 2012 Nasdaq 100 Re-Rank Review (found here), stocks dropped from an index normally outperform, overall.  In the case of KRFT, it was dropped late in the year after spinning off a unit.

If tomorrow was the beginning of the new trading year, these companies would be the Dogs of the Dow for 2013.

Ticker Company Current Price Current Yield
T AT&T, Inc.                 33.7 5.3%
VZ Verizon                 43.5 4.7%
INTC Intel Corporation                 20.5 4.4%
MRK Merck & Co. Inc.                 41.2 4.2%
HPQ Hewlett-Packard                 14.0 3.8%
DD Dupont                 45.1 3.8%
PFE Pfizer Inc.                 25.1 3.8%
GE General Electric Company                 20.7 3.7%
JNJ Johnson & Johnson                 70.1 3.5%
MCD McDonald's Corp.                 88.7 3.5%
  Dogs of the Dow Average   4.07%

There are eight companies that are being carried over from the previous year.  Hewlett-Packard (HPQ) and McDonald’s (MCD) are the new additions.  Hewlett-Packard made the list after the stock slumped -45%.  Interestingly, HPQ has the lowest payout ratio using next years estimated earnings of $3.48.

The primary issue we have with the "Dogs of the Dow" strategy is that it assumes all 30 companies have similar retained earnings and payout ratios.  However, we believe that the dividend yield is a relative valuation and not absolute figure.  As an example, utilities and telecom companies will typically have higher yields than those of other industries such as technology.

As an alternative, we have come up with a different approach to the "Dogs" strategy to determine if there is any merit to our "relative value" assessment.  Instead of looking at the 10 highest yielding stocks of the Dow Jones Industrial Average, we will look at the top 10 stocks closest to their respective 52-week low.  We'll call this ‘Dogs of NLO’.

Here are the top 10 companies we came up with for 2013.

Ticker Company Current Price Current Yield
MSFT Microsoft Corporation           27.0 3.4%
MCD McDonald's Corp.           88.7 3.5%
INTC Intel Corporation           20.5 4.4%
DD Dupont           45.1 3.8%
AA Alcoa Inc.             8.6 1.4%
IBM IBM         192.7 1.8%
UNH UnitedHealth           54.4 1.6%
KO Coca-Cola           36.4 2.8%
MRK Merck & Co. Inc.           41.2 4.2%
CAT Caterpillar Inc.           87.7 2.4%
  Dogs of NLO Average   2.92%

It should be noticed that the dividend yield is considerably less than that of the Dogs of the Dow strategy.  Some could argue that having a low yield will likely result in a lower return, however, as we've demonstrated in an article dated titled "Low Yielding Stocks Offer Exceptional Gains" (found here), the one year gains for low yielding stocks can be outsized.  In another article dated November 10, 2010, titled "Comparing Two Dividend Strategies" (found here), a comparison of low dividend yielding stocks to high dividend yielding stocks, the low yielding stocks have outperfomed by an ever increasingly wide margin as time has passed (2-year updates found in an article titled "Comparing 2 Dividend Strategies: Redux").

Again, this article is to provide a look back at the Dogs of the Dow performance in 2012 and possible picks for 2013.  While we have offered alternative strategies, we haven’t back tested it therefore we cannot and will not guarantee the outcome.  However, we feel strongly that it has a higher chance of outperforming the strategy initiated by Michael O’Higgins in 1991. Only time will tell, so we'll be sure to check  back for a review one year from now.

Note: We've recently written about a technical breakout in Caterpillar (CAT) so we believed 2013 will be a great year for the stock.