Making money from the Dogs of the Dow theory

By Author Charlie Gibson Apr 26, 2006

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An environment of “slowing corporate earnings and higher interest rates” suggests that investors should play it safe, says Beth Piskora on BusinessWeek.com. One way to do this is to follow the Dogs of the Dow theory, where investors buy the ten highest-yielding stocks in the Dow Jones Industrials Average.

They’re considered high quality because they’re in the Dow in the first place and low risk because their yield is so high. But while this has been a successful strategy in the past, more recently the Dogs have performed well in only one of the past five years.

So it might be time to finesse the theory. Screening to see which Dogs also attract buy recommendations from S&P’s analysts, for example, shows that only four names out of the original ten – Altria (MO, $69.00, yield 4.6%), Citigroup (C, $48.05, 4.1%), Coca-Cola (KO, $41.26, 3.1%) and Pfizer (PFE, $24.50, 3.9%) – “pass muster”.

Interestingly, however, says Michael Kaye, also on BusinessWeek.com, this is almost exactly the same result as applying more stringent rules would produce. Screening for firms with a dividend yield of at least 3.8%, boasting rising dividends in each of the past ten years, and with both a buy recommendation and ‘fair value’ rating from S&P analysts, also throws up Altria, Citigroup and Pfizer.

Citigroup turned up again in a Forbes search for companies outside the normal dividend-paying sectors with “yields in excess of 4%”, low valuations and solid financials. The others were AT&T (T, $25.58, 5.2%) and Verizon (VZ, $32.81, 5.0%) – also both Dogs – furniture manufacturer Kimball International (KBALB, $14.27, 4.4%); Lyondell Chemical (LYO, $21.11, 4.4%); Superior Uniform Group (SGC, $11.40; 4.8%); Tupperware (TUP, $21.65, 4.1%); and Unilever (UN, $67.81, 4.6%).

Finally, says Joseph Lisanti, also on BusinessWeek.com, if you’re after tech stocks that pay dividends, then the following have a history of payments: Analog Devices (ADI, $38.14, 1.7%); Applied Materials (AMAT, $18.11, 1.1%); Imation Corp (IMN, $41.95, 1.1%); Integral Systems (ISYS, $25.44, 0.8%); Intersil Corp (ISIL, $28.24, 0.7%); Microsoft (MSFT, $27.07, 1.3%); Microchip Technology (MCHP, $35.96, 2.1%); National Instruments (NATI, $32.81, 0.7%); and Qualcomm (QCOM, $51.48, 0.9%).

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Published in Tips & advice | More articles by Charlie Gibson

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