Owning the "Dogs of the Dow," a popular dividend strategy, has been a lucrative investment in 2016. The 10 highest-yielding names in the Dow Jones Industrial Average have returned more 20% year to date (including dividends) and outperformed the overall index of 30 companies by more than three percentage points.
Caterpillar (CAT) and Chevron (CVX) have been the big winners in 2016, both gaining more than 30% year to date. On the other hand, model portfolio holding Pfizer (PFE) was the laggard of the group, posting a flat return year to date, before dividends.
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When the list of Dogs is rebalanced for 2017 at the end of this week, it appears Boeing (BA) and Coca-Cola (KO) will replace Merck (MRK) and Walmart (WMT) . The other five remaining holdings in the strategy are Cisco Systems (CSCO) , Exxon Mobil (XOM) , IBM (IBM) , Procter & Gamble (PG) and Verizon (VZ) .
Of the names in the Dogs strategy, in addition to Pfizer, which is already held in the model portfolio, Cisco stands out as the most attractive stock at current levels. The shares have gained 12% year to date, trading around $30, and also sport a solid 3.4% dividend yield.
The telecom equipment giant can cover its quarterly dividend of 26 cents a share 2.3 times with expected fiscal 2017 (ending July) earnings of $2.37 per share. Investors at the close of trading on Jan. 3, 2017, will qualify for the next payment on Jan. 25, 2017. The company has a strong balance sheet, with twice as much cash as debt and we believe there is room for management to boost the dividend in the first quarter of the new year.
As for Pfizer, management increased its quarterly dividend earlier this month to 32 cents a share (3.9% yield). Investors at the close of trading on Jan. 31, 2017, will qualify for the latest payment on March 1, 2017. The drug maker has raised the payout eight straight years and can cover the dividend 2 times with expected 2017 earnings of $2.61 per share.
Even though Pfizer lagged the broader market in 2016, we believe the shares offers investors both attractive growth and income potential, even if trading volatility increases in 2017.