WASHINGTON, December 8, 2017: Hey, investors! It’s that happy time of the calendar year when we all get to guess high-yielding but miserably performing stocks in the Dow Jones Industrial Average (DJI or DJIA) will be declared the official Dow Dogs of 2018.
For our 2017 list, check out: Our Prudent Preliminary 2017 ‘Dogs of the Dow’
Numerous website carry this info, including the appropriately named dogsofthedow.com. The site provided the following list, correct as of COB December 6, 2017. I edited their list slightly, as I’ll explain after you check out the chart, which has clickable links to each stock listed.
Please note: This useful site hits you rather quickly with annoying pop-ups, so be forewarned.
Also note: We don’t get any $$ from anything or anybody we mention here, although there are days when we wish we did.
So here’s the chart already:
|NYSE / NASDAQ||The Dow stocks ranked by yield on 12/6/17||on 12/6/17||on 12/6/17||on 12/6/17|
|IBM||International Business Machines||154.10||3.89%||No|
|PG||Procter & Gamble||91.25||3.02%||No|
The meaning of the term “Small dog” in the final column above simply referernces the five stocks in the list with the lowest price per share.
My edits: Just one, but I’m surprised the dogsofthedow site missed it. They had GE listed on the top of the yield rankings with a yield in excess of 5 percent. That’s wrong. GE was a miserable performer this year and its new CEO is doing some serious “transformation.” Most obvious to dividend fans is that he gave a big haircut to GE’s dividend last month, which is now 2.72 percent. As a result, I transposed GE’s position to the bottom of the list as the lowest yielder of the current list. It’s per share price is also now the cheapest, as it really got hammered when that dividend was cut.
The Dow Dogs – aka, The Dogs of the Dow – have an interesting history, but we won’t waste your time with that here. Essentially, the Dow Dogs list is an annual compilation of Dow stocks that are, rightly or wrongly, woefully underpriced at the close of the current calendar years in terms of the dividends they pay. In other words, these are stocks with steady and perhaps even rising dividends that have performed poorly when measured against their peers each year.
Why would you be interested in turkeys, er, dogs like these? According to the the “Dogs of the Dow Theory,” if you compile a list of these puppies at the end of the year and promptly invest in the Top Five yielders (or all 10 if you want), then buy them and hold them for the calendar year, you’ll get swell dividends during the next calendar year at the very least.
“But wait!” as they like to say on late night cable TV commercials. “There’s more.”
Better yet – or so the theory goes – you’ll get outsized capital gains on most of them. Hence the popularity of the Dow Dogs as we pivot at the end of each December (or the beginning of each January) to invest in a dog pound of current poor performers.
Does this theory actually work? Well, nothing works all the time in the stock market. As they drummed into me in broker training class many moons ago, “Nothing in the market is ever ‘guaranteed.’ So don’t ever tell any customer that the return on something is ‘guaranteed.'”
That said, I’ve employed the theory, or at least part of it, many times and have often (though not always) been delighted with the results.
Again, without getting too technical and geeky, the Dow Dogs gambit is based on the simple reality of year-end tax loss selling coupled with what’s called “negative momentum.” In other words, whether they pay good dividends or not, the stocks that make it into this list have performed poorly for those who invested in them during the current calendar year. As a result, many holders are likely to dump them at the end of the year to write the losses off against any capital gains they may have taken in better performing stocks that year.
In other words, they use the losses to offset some of their gains in order to cut their taxable investment income at the close of the year. It’s called “tax loss selling.”
But if these stocks have performed poorly during the year, they also carry some “downside momentum” with them, meaning that the end-of-year selling simply makes them look worse as the price per share continues to drop. In turn, this is what ends up giving five to ten Dow stocks pride of place as official Dow Dogs. When we turn to a new year, during the first few trading days of January, it’s not surprising, then, that these stocks have a tendency to bounce up rather smartly, at least short term, largely due to active buying by investors who subscribe in various ways to the Dow Dogs Theory.
If these stocks maintain or increase these gains by the following December, their lucky holders can bask in the glory of a year’s worth of swell dividends plus that all important capital gain. They can then dump their current Dogs in the New Year and invest in the next batch. (Of course, when one or more of the current dogs don’t work, we never tell anybody about that, right?)
In the Wild West world of Wall Street, once a theory appears to work – as this one does with some frequency – there’s always that smart guy next door who tries to refine the theory and make it work even better. Variations include constructing “Dogs” lists in industrial sectors, putting together similar lists using the 10 largest S&P 500 stocks that pay outsized dividends, etc. You can put together various search terms to dig up even more of these competing “Dogs” theories. The methodology used by the “dogsofthedow” folks cited above appears here.
As for those who don’t want to do all this digging, or spend the signficant amount of time it takes to research all the variations on the original Dow Dogs theory, there’s at least one easy way to finesse the issue: Simply purchase shares in the ALPS Sector Dividend Dogs ETF. Its convenient trading symbol is SDOG. That’s certainly easy to remember.
The ALPS folks describe their ETF briefly as follows:
“The investment seeks investment results that replicate as closely as possible – before fees and expenses – the performance of the S-Network-® Sector Dividend Dogs Index. The underlying index generally consists of 50 stocks on each annual reconstitution date- which is the third Friday of December each year. The underlying index’s stocks must be constituents of the S&P 500 Index- the leading benchmark index for U.S. large capitalization stocks. The underlying index methodology selects the five stocks in each of the ten GICS sectors that make up the S&P 500 which offer the highest dividend yields as of the last business day of November.”
We put together a broad portfolio of S&P 500-listed, beaten down, doggish stocks with great dividends that’s geared to match the standard set by the S-Network organization’s “Sector Dividend Dogs” index. We use 50 stocks (often the same ones in the index) to emulate that index’s return. When we turn over, or “reconstitute” our portfolio on the 3rd Friday of each December, we base our buys and sells on a new selection of doggy stock allocated among the 10 industrial sectors designated by the Global Industry Classification Standard (GICS). The list is finalized after we check our list to make sure we’ve got the highest-yielding dividend paying stocks as of COB on the last business day of November.
In other words, the ALPS folks have already put together a much broader portfolio of Dogs that still offers a relatively high yield, even as their ETFs diversification spreads your risk out more broadly than investing in just a few Dow Dogs ever would.
FYI: the GICS standard expanded its industry sector listing from 10 to 11 recently, creating a new sector for Real Estate Investment Trusts (REITs) that specifically invest in real estate holdings rather than mortgages. The latter REITs remain in the GICS financial sector. Given the relatively hight yields of such REITs, this could mean that the yield for SDOG might get kicked up a notch in 2018. SDOG currently yields 3.25-3.5 percent.
Of course, the price you pay for SDOG’s gurus to manage and adjust this portfolio is the invisible service fee that all ETFs charge against earnings. This means that the value of the dividends and potential capital gains you might get are eroded somewhat by the ETF’s fees. Currently, ALPS charges a 0.40 percent management fee against SDOG investments. It’s higher than discount brokerage house’s typically marginal fees, but isn’t out of line, at least in my opinion. In any event, there’s never a free lunch anywhere (except for individuals who don’t pay taxes for whatever reason).
Of late, I’ve frequently jumped into this ETF myself on or around the first of the year. I generally hold SDOG, or even add to my holdings of this ETF on dips until it runs out of steam. Then I put in a sell order and move along. Frankly, it’s easier and (I think) somewhat safer to hold a much larger doggy portfolio like SDOG then to take a chance on 5-10 specific and rather expensive Dow stocks.
Morningstar rates SDOG with 4 stars for its 3- and 5-year and overall performance, which is pretty decent, all things considered. The ETF’s most recent “top holdings” include T. Rowe Price Group (TROW), Valero (VLO), Seagate Technology PLC (STX), Mosaic Company (MOS), Caterpillar (CAT), Cisco Systems (CSCO), Macy’s Inc. (M), Garmin Ltd. (GRMN), Invesco (IVZ), People’s United Financial (PBCT). Not a bad list.
There are other portfolio management firms that offer similar products, but this one has worked for me and it trades in decent volumes, which is a plus for price stability in any stock or ETF. An added plus: my discount broker doesn’t charge any commission for trades in SDOG, which means you can move in and out of it however long you hold it without adding a commission penalty to the usual ETF fee.
Again, this is not a recommendation. I don’t do that in this column. But it’s one way you can follow and perhaps profit from the Dow Dogs phenomenon (at least in terms of the S&P 500-based version) without having to restrict yourself to a small number of expensive stocks.
Meanwhile, we’ll keep on top of the ever changing list of real Dow Dogs and report back when the list has become official.