DOW Stocks With Strong Dividends A Great Buy
I was recently reviewing a few of my older articles. One from the end of 2007 stuck in my mind, Does this Investment Strategy Still Work? It was a review of a well known investment strategy – the “Dogs of the Dow.” You’ve no doubt heard of the strategy. Perhaps you implement part of it in your own portfolio.
For those of you who don’t know, the “Dog of the Dow” is a simple investment strategy.
It was presented back in the early 1990s and called for buying ten Dow stocks every year. But you only bought the stocks with the highest dividend yields. Then every year, in January, you look at the data again, and invest in a new group. The strategy’s really a call for value investing. In order to have high yields, a company’s stock would need to be depressed relative to recent dividends.
The bigger the dividend, or the lower the share price, the higher the yield.
This means buying good solid companies (which most Dow stocks are) with strong earnings. When the stock price was beaten down enough it became a good buy. When the strategy was first introduced, it had a phenomenal track record. In the 1980s and 90s, the Dogs strategy frequently outperformed the Dow Jones Industrial Average and the S&P 500.
Not too shabby. Unfortunately, the trend didn’t continue.
In the last 5 and 10 year periods, the strategy actually underperformed the market. The problem was simple. Value investing was out of favor with the “Wall Street” crowd. Value investing also takes time. It’s not uncommon for investors to hold onto stocks for years.
Just look at Warren Buffett. He’s a famous value investor who holds investments for decades (or longer).
In my article, I recommended leaving the Dogs of the Dow strategy – to the dogs. But now I’ve changed my mind, and unlike most politicians, I’m not afraid to admit it.
So what prompted me to change my mind?
Two things. First, I believe value investing might be making a comeback. Second, the yields on many of the Dow stocks are eye-popping.
Like all things, investment trends move in cycles. Over the last decade or so, momentum and growth investing were the top performing styles. Now, with share prices so depressed, I think the focus will shift to value investors.
If you don’t believe me, just watch the talking heads on the financial networks. You’ll see an amazing number of “Deep Value” money managers crooning about the great opportunities in the market.
Dividend yields are also getting crazy.
I’ve been watching the markets for years and years. I’m struggling to remember a time when dividend yields were this high!
- Citigroup (C) yields 9.0%
- Pfizer (PFE) yields 7.6%
- Verizon (VZ) yields 6.3%
- AT&T (T) yields 6.1%
- General Electric (GE) yields 5.9%
These are some of America’s largest and strongest companies. Amazingly they’re paying dividend yields higher than a 10-year Treasury. It’s a value investor’s dream. Now’s the time to strike.
You can scoop up some of America’s greatest companies at a huge discount. Right now more than a third of the Dow stocks yield over 4%. They pay great dividends, and (unlike bonds) have the potential for growth – not only in stock price, but in future dividends as well.
As with everything there’s a bit of risk.
The dividends might get cut or even eliminated. The stock prices may fall further. We might enter another Great Depression, and the entire economy might go to hell in a hand basket.
So, if you do decide to buy, buy for the long-term.
If you’re going to do this strategy, you’ll need to commit for the long term.
There is another alternative. If you don’t feel like picking just a handful of companies, you can always buy a larger basket of all 30 Dow stocks.
The Dow has an ETF that tracks its performance called the Diamonds (DIA). It pays a monthly dividend which works out to $2.98 per share for the year. With the Diamonds trading at $90 right now, they have a yield of 3.3%. Not bad considering you get to capture future growth in the dividend as well . . . back in 2002 the Diamonds were kicking out dividends of $1.74.
So over the last 6 years the dividend’s grown by 71%.
Now, I’d never suggest you buy just for the dividend alone . . . that’s a recipe for disaster. But if you have a long-term time horizon, consider buying a basket of strong companies currently paying a solid dividend. I believe now’s the time to pull the trigger and load up!
Category: Stocks
