2016 Dogs of the Dow: 10 Stocks to Keep Your Eye On

By Markets Fool.com


Wal-Mart is a new member of the Dogs of the Dow. Image: Wal-Mart.

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Dividend-paying stocks appeal to many investors, with low interest rates on bonds making them one of the sole remaining sources of plentiful portfolio income. For income-hungry investors, the Dow Jones Industrials and its 30 constituents are an obvious place to look for high-quality dividend stocks. One way that dividend investors use the Dow to come up with a simple-to-follow strategy is known as the Dogs of the Dow, which offer both above-average yields and often outperformance on a total return basis. Let's look more closely at this year's 10 Dogs of the Dow to see whether the strategy is worth looking at more closely in 2016.

The 2016 Dogs of the Dow

Stock

Dividend Yield

Verizon

4.9%

Chevron

4.8%

Caterpillar

4.5%

IBM

3.8%

ExxonMobil

3.8%

Pfizer

3.7%

Merck

3.5%

Procter & Gamble

3.3%

Wal-Mart

3.2%

Cisco Systems

3.1%

Source: DogsoftheDow.com.

Welcome to the new Dogs of the Dow
Each year, the methodology for the Dogs of the Dow results in changes to the annual lineup of 10 stocks. The stocks listed above represent the Dow stocks with the highest dividend yields as of the beginning of the year. Under the strategy, you'll hold these stocks all year, and then do the same process at the end of 2016 to come up with 2017's list.

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For 2016, six of the 10 Dogs of the Dow remained the same as last year's group. AT&T was removed from the Dow Jones Industrials entirely, making it ineligible for future consideration. But for the most part, the changes reflect shifts in investor sentiment in key areas. In particular, large advances for 2015 Dogs General Electric and McDonald's reduced their yields significantly enough to take them out of the running for this year's list.

By contrast, the new entrants have seen poor performance. Consumer-oriented Procter & Gamble has struggled from the impact of the strong dollar on its international business, sending its shares down by double-digit percentages in 2015. Wal-Mart has endured even tougher conditions, citing higher labor costs and the need to reinvest in its e-commerce channel as reasons to expect sluggish performance going forward and sending its stock down by more than 25% in the past year. Similarly, IBM and Cisco Systems have had difficulties in adapting to the highly competitive market in the technology industry, and their efforts to reinvent themselves have failed to succeed to the same extent as some of their rivals.

Will the Dogs of the Dow top the market in 2016?
The Dogs of the Dow isn't a consistent winner over simply investing in the entire Dow, but it has had success at times. For 2015, the strategy resulted in a decline of about 1% on a price basis, eking out a win over the 2% drop for the Dow. Moreover, the higher dividends from the Dogs led to a larger total-return advantage over the overall Dow.

Past years have seen more mixed results. In 2014, strength in tech stocks came close to overcoming poorer results from telecom and energy issues. On a total-return basis, the Dogs eked out a small victory, but only after including the higher dividends the Dogs paid. 2012 brought a slight underperformance, but wins in 2010, 2011, and 2013 of four to six percentage points annually made many investors take notice of the strategy.

Over the longer run, the Dogs of the Dow haven't demonstrated their dominance, with underperformance in 11 out of the last 20 years. Those periods have featured numerous markets in which momentum-based investing has worked better than the value-oriented bottom fishing that helps the Dogs outperform the best.

Investors shouldn't rely on the Dogs of the Dow to give them strong returns each and every year. Yet if you're looking for healthy blue-chip stocks that pay high dividend yields, the Dogs of the Dow strategy is a good way to narrow down your prospects to find stocks that are worth investing in. As investors look for conservative strategies after a rocky start to the year, the Dogs of the Dow could be just the right idea for your portfolio.

The article 2016 Dogs of the Dow: 10 Stocks to Keep Your Eye On originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil and General Electric Company. The Motley Fool recommends Chevron, Cisco Systems, Procter & Gamble, and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.