AT&T Inc.(T), Verizon Communications Inc. (VZ): The Dogs of the Dow Are Outperforming Their Index

The “Dogs of the Dow” dividend strategy is one of the simplest for beating the market. Over the coming year, I’ll track the Dogs’ performance and keep you abreast of news affecting these companies.

AT&T Inc. (T)

The strategy
The Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average . The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would get not only large dividends but also gains in the stocks underlying those dividends.

High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:

Many people fear that increasing dividend yields mean lower portfolio returns.

Others believe that dividend payments mean that management believes the business is done growing.

Evidence compiled by Tweedy Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.

Performance
After beating the Dow by 6.8% in 2011, the Dogs of the Dow underperformed the Dow by 0.2% in 2012.

Check out the Dogs of the Dow’s performance in 2013 so far:

Company Initial Yield Initial Price YTD Performance
AT&T Inc (NYSE:T) 5.34% $33.71 9.47%
Verizon Communications Inc. (NYSE:VZ) 4.76% $43.27 14.61%
Intel Corporation (NASDAQ:INTC) 4.36% $20.62 4.56%
Merck & Co., Inc. (NYSE:MRK) 4.20% $40.94 8.26%
Pfizer Inc. (NYSE:PFE) 3.83% $25.08 14.16%
E I Du Pont De Nemours And Co (NYSE:DD) 3.82% $44.98 10.52%
Hewlett-Packard Company (NYSE:HPQ) 3.72% $14.25 62.71%
Portland General Electric Company (NYSE:POR) 3.62% $20.99 12.25%
McDonald’s Corporation (NYSE:MCD) 3.49% $88.21 13.45%
Johnson & Johnson (NYSE:JNJ) 3.48% $70.10 14.67%
Dow Jones Industrial Average 13,104 10.74%
Dogs of the Dow 16.47%
Dogs Return vs. Dow (Percentage Points) 5.7%

Source: S&P Capital IQ as of March 23.

This week, the Dow Jones Industrial Average was basically unchanged. The Dogs of the Dow rose more than the index, moving up 0.77%. That brings the Dogs’ outperformance up to 5.7 percentage points better than the Dow!

Movers and shakers
The biggest mover this past week among the Dogs was again Hewlett-Packard, which rose 3.88%. Wednesday brought HP’s long-awaited annual meeting, where three board members were on the hot seat after proxy adviser Institutional Shareholder Services recommended that shareholders vote against them. All three were in charge during the company’s ill-fated acquisition of Autonomy for $10 billion in 2011. HP subsequently marked down the acquisition by $8.8 billion just over a year later and alleged fraud against Autonomy’s former management.

All three were approved at the meeting, but just barely, with none of the three getting more than 60% investor approval. There’s good news for dividend investors, though: After the meeting, HP announced that it will increase its quarterly dividend by 10%, to $0.1452, for a forward dividend yield of 2.5%.

The second biggest mover was Verizon Communications Inc. (NYSE:VZ), which rose 2.08%. There has been a lot of speculation recently that Verizon would buy Vodafone Group Plc (ADR) (NASDAQ:VOD)‘s 45% stake in Verizon Wireless, or perhaps Vodafone as a whole. The one issue is that the deal would be massive, requiring the company to either take on a huge amount of debt or issue shares, neither of which would be great for shareholders. Travis Hoium recently looked at three possible scenarios for Verizon Communications Inc. (NYSE:VZ) Wireless. You can click here for his take.

Upcoming
The parliament and other leaders of Cyprus are working throughout the weekend to raise 5.8 billion euros to receive a bailout of 10 billion euros from the European Central Bank. While at the moment a bank deposit tax looks to be off the table, it remains to be seen what will happen. Banks in Cyprus have been closed since last week as Cypriot lawmakers rejected the first plan to save the country’s financial system. The ECB has set a deadline of Monday to raise the necessary funds.

The article The Dogs of the Dow Are Outperforming Their Index originally appeared on Fool.com and is written by Dan Dzombak.

Find Dan Dzombak on Twitter, @DanDzombak, or on his Facebook page, DanDzombak. He owns shares of Vodafone.The Motley Fool recommends Intel, Johnson & Johnson, McDonald’s, and Vodafone and owns shares of General Electric Company, Intel, Johnson & Johnson, and McDonald’s.

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