Investing

Dogs of the Dow Could Be a Huge Winner Again in 2017

Lee Jackson

Published: January 9, 2017 8:50 am

Last Updated: January 12, 2020 4:03 pm

The higher the market goes, the riskier it is to have assets in the stock market. But the fact of the matter is, with bond yields low and the bond proxy sectors like utilities and real estate investment trusts (REITS) set to underperform, the choices are limited. There is an investment vehicle that may offer investors a way to stay in equities, get paid solid dividends and have the potential for outperforming total return.

A new research report from Merrill Lynch’s outstanding technical research analyst Stephen Suttmeier points outs some very interesting performance facts on the 10 highest yielding stocks that make up the Dogs of the Dow.

1. The average yield for this year’s 2017 Dogs of the Dow is 3.56%. That figure is over a half percentage point or 50 basis points higher than the 30-year U.S. Treasury Bond.
2. The Dogs of the Dow beat the S&P 500 soundly in 2016 with a total return of 20.5%, versus the venerable index’s 12%. Total return is the increase in share prices plus the dividend yield added together.
3. All 10 stocks that made up the 2016 Dogs of the Dow had positive returns in 2016. Eight of those stocks in the group also beat the S&P 500.
4. The Dow Jones High Yield Select 10 Total Return Index (MUTR), which is a proxy for the Dog of the Dow, has had an average annual total return of 9.2% going back to 2001. That compares with the S&P 500 total return figure for that same time period of 7.2%.

Despite the outstanding returns of the Dogs of the Dow both collectively and individually last year, there are only two changes to the portfolio. A big reason for that of course is that the stocks are the highest yielding in the Dow Jones Industrial Average.

We recently did an in-depth look at the stocks that make up this year’s Dogs of the Dow, carefully examining each of the stocks that are in the portfolio.

Suttmeier is a technical research analyst at Merrill Lynch, so his work is concentrated on the technicals, which included trading volume, stock movement on a positive and negative basis, and overall chart activity. His work notes that most of the companies in the Dogs of the Dow are anywhere from so-so to very positive. He does point out that both Coca-Cola Co. (NYSE: KO) and Merck & Co. Inc. (NYSE: MRK) are somewhat weaker technically than the other constituents.

The good thing for investors, especially those with more conservative accounts, is this portfolio is chock full of large cap companies that have been around for years. The risk factor is far lower, and it is important to remember that these stocks are in the portfolio because they are the highest yielding in the 30 Dow components. Relative to their peers in the index, they should be lower priced.

One good way for investors to own the Dogs of the Dow may be the ELEMENTS Dog of the Dow High Yield Select 10 Total Return Exchange Traded Note (NYSE: DOD). This is an ETN option that provides investors a pure play to the 10 highest dividend-yielding securities in Dow Jones Industrial Average in equal proportions, but will not pay the dividends. It closely replicates the Dow Jones High Yield Select 10 Total Return Index and charges 75 basis points, three-quarters of 1%, in annual fees. Buying all 10 stocks at a brokerage firm, even it’s a discount firm, would be very expensive, so this clearly makes the most sense.

To own the actual stocks in the Dogs of the Dow, investors should consider a unit trust, which will own the stocks for a calendar year and then reset the portfolio every year as changes are made. Investors are charged once a year. Top companies like Invesco and First Trust offer these every year, and they can be purchased through full service or discount brokers.

While there is no guarantee the Dogs of the Dow will outperform again, it is a great way for investors to own top high-quality stocks, receive dividends and have less volatility than other investment avenues.