The Dow Jones had a great year in 2016.
The leading index delivered a price return of 14% and paid a dividend yield of 2.7% for a total return of almost 17%. Any way you look at it that is an excellent year for U.S. stocks.
However, you could have easily done even better.
My colleague Joseph Hogue recently profiled a simple but powerful strategy that has a history of beating the market while also deliver superior yields.
Here’s what Joseph said:
The 30-stock Dow has also given rise to one of the simplest stock-picking strategies you'll ever find and one that has consistently beaten the broader market. The "Dogs of the Dow" strategy targets the highest yielding stocks in the DJIA each year.
Investors buy the ten stocks with the highest yield in January, buying equal amounts of each and hold them through the year. It's surprisingly simple but has beaten the stocks in the S&P 500 by 1.7% annually over the last decade.
Joseph recommended focusing on the Small Dogs of the Dow, a strategy that has an even better performance history. Take a look below.
I am expecting another great year for the Small Dogs.
Bond yields recently hit a new multi-year high. For example, the 10-year Note yield just hit 2.4%, up more than 60% from just six months ago. With the Fed planning to hike rates three times in 2017, bond yields should continue rising.
I expect this to have a big impact on the Dogs of the Dow. Stocks not growing their dividend will be less valuable and less attractive to income investors with every uptick in bond yields.
That’s why I expect the Dog stocks with the best dividend growth rates to be in favor with investors and Dog stocks with slow or no dividend growth to be out of favor.
With that in mind, here is a list of the 10 Dogs of the Dow for 2017, including each company’s dividend yield and five-year dividend growth rate.
|Company||Ticker||Dividend Yield (%)||5-Year Div Growth (%)|
From this group, I am going to highlight the two new entries into the strategy that also happen to have two of the best dividend growth rates.
Coco Cola (NYSE: KO) made it into the Dogs because of a challenging 2016. Shares were up more than 12% in early April before closing the year with closing the year even. Those losses were driven by worries over some challenges facing Coke. For example, increased regulation of sugary drinks and higher tax rates. However, despite the underperformance in 2016, there is still reason to be optimistic about Coke. Coke is a reliable dividend payer with a great yield. It has grown its dividend by 44% in the last five years. Its current yield of 3.4% is near a 5-year high and a 24% premium to the Dow Jones Industrial Average. And Coke’s earnings should be headed higher in 2016. After earnings fell 3% in 2016, analysts are expecting 4% earnings growth in 2017.
Boeing (NYSE: BA) had a solid 2016. Shares gained 11%. Including dividend payments, Boeing delivered a total return of almost 15%. I am expecting more of the same in 2017. Boeing’s earnings are expected to spike 30% to $9.22 per share. On the dividend front, Boeing has been on shelling out huge dividend hikes. In the last five years Boeing’s dividend has increased 146%. Those increases have shares offering a current yield of 3.6%, a 31% premium to the Dow Jones. Despite the promising outlook, Boeing trades at a discount to the S&P 500 and its historical average. Boeing’s forward P/E ratio of 17 is a 20% discount to the S&P 500 and near its 5-month low.
Risks to Consider: With the Fed projecting three rate hikes in 2017, bond yields are trading near a multi-year high. This is making bonds more attractive to investors looking for yield. Although I still expect dividend stocks to remain in favor, higher bond yields could divert capital inflows away from dividend stocks and into fixed-income assets.
Action to Take: The Dogs of the Dow is a simple but powerful strategy with a history of delivering market-beating returns. With bond yields set to rise in 2017, I am expecting Dog stocks with the highest dividend growth rates to be in favor with investors and delivering market-beating returns.
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