Dogs and diversification

When it comes to investing, you’re better off with a pack of dogs, rather than just one pup. And the returns from Dogs of the Dow this year provesit.

The basic premise behind the Dogs of the Dow is fairly elegant. You’re supposed to buy stocks low and sell them high. But many stocks deserve to be low: They’re poorly managed, like Wells Fargo, or they’re in a dying business, like Gannett, or they’re really just walking catastrophes, like Enron.

Whatever the faults of the Dow, the 30 stocks in the Dow Jones industrial average are large-company high-quality stocks spread across a variety of industries. But each year, some of these companies lag the broad index and others lead. It’s just the nature of the market, which loves different industries at different points in the market.

Rosie, the dog of the day

The ones that are unloved — and, hence, dogs — are the ones with the highest dividend yields. Companies normally don’t have high yields because their executives are swell people who want to dole out profits to investors. Most often, it’s because the company’s stock price has been clobbered.

After all, a stock yield is a function of two factors: Its 12-month payout divided by its current price. A stock with a $1 annual dividend and a $50 price has a 2% yield. Drop the price to $40, and the yield pops up to 2.50%. So typically, a Dog of the Dow has a high yield because its stock price has been clobbered.

Last year’s dogs rose by an average 23.6%, vs. 21.83% for the Standard & Poor’s 500, proving that sometimes it does indeed pay to buy low and sell high. (The Dogs of the Dow have had a spotted record the past few years).

This year’s Dogs of the Dow prove a further point: It’s better to invest in 10 stocks than one or two. Here are how 2017’s dogs fared last year:

Investment Ticker Return
Boeing Co BA 94.50%
Caterpillar Inc CAT 74.75%
Chevron Corp CVX 10.59%
Cisco Systems Inc CSCO 31.19%
Coca-Cola Co KO 14.39%
Exxon Mobil Corp XOM -3.75%
International Business Machines Corp IBM -4.03%
Merck & Co Inc MRK -1.46%
Pfizer Inc PFE 15.75%
Verizon Communications Inc VZ 4.07%
Average 23.60%
Median 12.49%

Dividends, gains, reinvested. Source: Morningstar.

As you can tell, without the returns from the big dogs — Boeing, Caterpillar and Chevron — the dogs would be whining instead of barking.

The Dogs of the Dow is an interesting lesson in dividends and value investing — but its biggest lesson is that it’s better to own the entire litter than just one pup.




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