WASHINGTON, December 27, 2015 – The Maven is not at all ashamed but is still slightly nonplussed to announce that his major portfolios have just endured their worst year since 2008. Unfortunately for all concerned, including many of Wall Street’s most famous hotshots, hedge funds and talking heads have endured similar results as markets whipped to and fro.
For that reason alone, the Maven and many other battered investors are looking forward to trying once again to make money in 2016. With four trading days remaining in 2015, it’s time to start looking once again at what might make us at least a bit of money and perhaps some yield as well. And that’s what brings us to our preliminary look at 2016’s likely Dogs of the Dow.
Very simply stated, the Dogs of the Dow theory is based on picking large company stocks with outsized yields, buying them early in the calendar year, more or less, and holding them for the whole year. You simply stack the shares in the Dow Jones Industrial Averages (DJI or DJIA) in inverse dividend order (from those paying the most to those paying the least) and eliminate all but the top 5 or the top 10, and voilà! You have your Dogs. Just buy ‘em and hold ‘em.
This attractive idea is a good one, at least theoretically. By buying shares of a few of America’s biggest companies that also pay comparatively high dividends and just sitting on them, any Dogs of the Dow investor should be able to make money short term on those dividends and longer term on the price appreciation those dividends must ultimately support.
But again, we’d emphasize that’s the theory, which isn’t always the outcome in your own portfolio. Over a long period of time, the Dow Dogs have indeed returned a superior performance, at least much of the time. But, like anything else on Wall Street, there’s no guarantee and your mileage may vary considerably.
The real underlying reason for the Dow Dogs theory is the simple fact that by choosing the highest dividend paying stocks in the DJIA, you’re buying major companies that have just been through a bad year or have endured tremendous tax-loss selling near year-end. The problem, though, is that while you’re buying major companies in a beaten-down state, there’s no guarantee whatsoever that things will automatically look up for them in the following year.
That’s particularly the case with stocks in our preliminary 2016 Dogs of the Dow list, which we present below. We say “preliminary” simply because final positions in the list—including possible new entrants—can change over the next 4 trading days. We’ll amend this list and give you our final list on New Year’s Eve after the market close. Until then, here are 2016’s most likely Dow Dogs candidates:
- Verizon (symbol: VZ). Unlike so many U.S. companies in 2015, Verizon has been continuing to invest in its platform, putting earnings and stock price both under pressure. But at its current price, it boasts the highest dividend in the Industrials, putting it at the top of our preliminary list.
- Chevron (CVX). Here’s a fine integrated fuel company (exploration, drilling, extraction, refining) that has an excellent history of raising its dividend and making lots of money. But then, there’s 2015 and beyond, making CVX just one example of a major Dow Dog pitfall—coming off one lousy year doesn’t automatically mean that the next year will be a winner. No one has any idea when oil prices will come back in line. That’s a danger to CVX’s price appreciation, although its dividend coverage seems secure at the moment mainly due to this company’s massive size.
- Caterpillar (CAT). This major American industrial stock has been a serious loser for the better part of two years and its dividend remains high mainly because CAT keeps buying back shares of its seemingly ever-declining-price stock. CAT, of course, is one of the few remaining major U.S. manufacturers of anything, and it’s still by far the world’s premier major mining and heavy-duty excavation equipment company. But that’s the problem. Commodities have been in at least a 2-year deflationary cycle, and real estate, while struggling to recover in most sectors, remains sub-par. Ergo, CAT is not selling very much of its pricey mining and construction equipment. Will 2016 be a turnaround year? Do you want to gamble? Like CVX, CAT is a roll of the dice right now.
- IBM (IBM). This onetime major computer manufacturer has been diversifying more into software services as the profitability of hardware offerings has steadily declined. It’s still a big company, but no longer seems in growth mode, and it’s been stuck in a rut for at least two years. Will FY 2016 prove to be Big Blue’s resurrection? Nobody knows, and management has not been very inspiring lately.
- Exxon-Mobil (XOM). The biggest of the big U.S. oil majors, XOM has been a “dividend aristocrat” seemingly forever, and its dividend still seems well covered. That said, it’s in the same boat as CVX and CAT. Will 2016 be a year of oil price and overall commodity recovery? Where’s the Oracle of Delphi when we need him?
- Pfizer (PFE). Tied with XOM right now for 5th and final place in the 2016 Dow Dogs final, PFE is also an unanswered question. The bad news: it’s going to go off a patent-expiry cliff in 2016. The good news: It’s in the process of acquiring Irish-domiciled drug giant Allergan (AGN) which will make PFE a true mega-giant if the company can pull this acquisition off. The bad news: That’s a big “if,” given the Obama administration’s increasing attempts to shrug off this kind of tax-dodging “inversion” transaction. If Washington can screw this one up, it will, and that could leave PFE’s price action very vulnerable indeed, in spite of its nifty dividend.
Stay tuned, and we’ll update our list of Dogs later this week.
But remember: This is one of many year-end stock-picking techniques. We’ll feature a couple others in the closing days of 2015. The final choices are yours. And, as 2015 certainly reminded us, absolutely nothing is ever guaranteed.