Pfizer Inc. (PFE), Hewlett-Packard Company (HPQ), and How The Dogs of the Dow Jones Industrial Average (.DJI) Beat Their Index This Week

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

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 (Dow Jones Indices:.DJI). 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.

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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.

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’ performance in 2013 so far:

Company Initial Yield Initial Price YTD Performance
AT&T 5.34% $33.71 17.33%
Verizon 4.76% $43.27 20.15%
Intel 4.36% $20.62 6.23%
Merck 4.20% $40.94 16.18%
Pfizer Inc. (NYSE:PFE) 3.83% $25.08 23.37%
DuPont 3.82% $44.98 11.75%
Hewlett-Packard Company (NYSE:HPQ) 3.72% $14.25 47.60%
General Electric 3.62% $20.99 12.68%
McDonald’s 3.49% $88.21 18.39%
Johnson & Johnson 3.48% $70.10 18.98%
Dow Jones Industrial Average 13,104 13.44%
Dogs of the Dow 19.27%
Dogs Return vs. Dow (Percentage Points) +5.83%

Source: S&P Capital IQ as of April 12.

This week, the Dow Jones Industrial Average was up 2.06%. The Dogs rose more than the Dow, moving up 2.32 percentage points. That brings the Dogs’ outperformance up to 5.83 percentage points better than the Dow.

The big news affecting the Dow this week was the release of the minutes from the Federal Open Market Committee’s March 20 meeting. The minutes were to be released at 2 p.m. ET on Wednesday but instead came out before the market open, after it was discovered that a staffer had accidentally sent out an email to congressional staffers and lobbyists early with details of the release.

The minutes revealed that there was disagreement over the continued asset purchases under QE3 and that committee members were unsure how fiscal policies would affect the economy. The committee is expected to continue QE3 until there is inflation above 2% or the jobs market significantly strengthens to the point where the unemployment rate is just 6.5%.