Time To Start Buying Some Dogs?

We all know the motto that tells us to invest when everyone else is fearful and to buy when everyone else is optimistic. We also know that over time, the market's tendency is to go up, not down. The Dow Jones Industrial Average, one of our three principal market barometers, is down around levels unseen since September 2006.

The erstwhile popular Dogs of the Dow strategy has averaged an annual return of 17.7% from the period 1973 through 2006. It hasn't done as well the last couple of years, but all investing strategies have their bad years. For those who have never heard of it, the strategy is very simple. At the start of the year, find and buy the ten highest yielding DJIA stocks (the dogs as they're called). Keep them for a year and a day, find the new list of the highest yielding DJIA stocks, and repeat. The idea is that you can evaluate large cap stocks based on their yields. The larger the yield, the more likely it is that the market is undervaluing the stock.

Here are the Dogs of the Dow, with their yields as of market close on 6/26/08:

Bank of America (BAC) 9.6%
Pfizer (PFE) 7.2%
General Motors (GM) 7.6%
Citigroup (C) 6.8%
Verizon (VZ) 4.9%
AT&T (T) 4.7%
General Electric (GE) 4.5%
Merck (MRK) 4.1%
JP Morgan Chase (JPM) 4%
DuPont (DD) 3.7%

Look at those yields! If the DJIA contains the best companies and the market over the long term tends to go up, aren't these dogs a steal? Maybe it's time to start buying a few shares here and there while everyone else is selling in this climate of fear?

I'm a bit skeptical for most of these. One common variation on the Dogs of the Dow strategy is to avoid the highest yielding stock, as it's usually the one facing the worst problems. But take a look at the top four.

Bank of America's CEO has recently stated that the dividend is safe. I don't know if I believe him. This one could turn out to be a great investment, but who knows how many subprime write-downs they have left? I'd stay away from this one.

Pfizer has its own dividend cut rumors. It also faces expiring patents on its most profitable drugs, like Lipitor (although it did recently buy an extra five months on that one).

General Motors was downgraded to a sell by Goldman Sachs, sending its shares to 53 year lows. High gas prices, the tight credit market, and the housing crisis are likely to continue to weigh on what was once a great American automaker.

Citigroup appears to be in even worse shape than Bank of America. It was just downgraded to sell by Goldman Sachs, which expects the struggling bank to post a $9 billion write-down in the second quarter. Citi's current yield of 6.8% belies its 41% dividend cut back in January of this year.

Verizon seems to be a better prospect. If the deal to buy Alltel goes through, Verizon will be the largest wireless provider in the US. While analysts have been concerned with the deal's price tag, the acquisition should add to Verizon's bottom line as soon as it's completed. Verizon's fixed line business, for services such as land-line telephone and DSL, also has some potential. Although landline phone use is declining and Verizon faces mounting competition from other internet providers, over the next few years the firm is poised to pick up millions of new customers (over two million a year). I don't think it's unreasonable to start picking up a few shares of this dog--but not a full position, we may be entering a bear market.

AT&T is also having some land-line troubles, as well as wireless successes. The company continues to cut costs. It has slashed over 14,000 jobs over the last three years. The firm's balance sheet is relatively clean, and it continues to buy back shares. AT&T hopes the culmination of its network upgrades, U-Verse, which is set to be deployed in 2010, will attract more customers. AT&T also has a deal with Apple (AAPL) for the new iPhone, which should also bring in new customers. As with Verizon, this stock may certainly go lower, but this doesn't seem to be a bad time to start picking up shares.

I think GE is being unfairly punished by the market. With most of its sales coming from abroad, its various footholds in emerging markets, and its alternative energy and water infrastructure businesses, I think the company has a bright future. This is not to say that the firm does not have problems (NBC Universal, GE Capital). Still, this sleeping giant is ready for some solid earnings growth in the future. If it falls lower, I'm looking to pick up some more shares.

Like Pfizer, Merck has some considerable challenges ahead of it. These include patent expirations on some of its biggest selling drugs (e.g., Singulair, Fosamax, and Cozaar) and increased competition in the near future on drugs it currently holds a monopoly over (e.g., Gardasil and Januvia). Merck also faces billions of dollars in potential liability from continued Vioxx lawsuits. Added to this, the FDA has rejected a number of the company's new drugs. A few drugs in the pipeline have similar chemistries, so they are likely to also be rejected. While the short term prospects are not too bad (until Glaxosmithkline starts selling alternatives to Gardasil and Januvia), the long term seems gloomy. In a couple of years, Merck might be in the same position Pfizer is in today.

Like the other financials, JP Morgan Chase has some difficulties. Losses stemming from home loans are likely to continue, and may even accelerate by the end of 2008. As the economy continues to slump, people use their credit cards less. They may also have trouble paying what they owe. This is likely to hamper Chase's earnings. At last count, the bank has over $20 billion in risky assets, and who knows what it's going to get when the Bear Stearns deal closes. There are some positives, though. The firm's retail banking division is growing. Its balance sheet also seems less affected by the subprime mess than those of its DJIA banking counterparts. Eventually financials will be great buys. Maybe the time to start picking up shares is now, but I'm not even tempted to do it.

DuPont, like GE, seems to be another stock being unfairly punished by the market. While its housing exposure is dampening profits, the firm has the world's second largest seller of seeds. There is a food crisis, and DuPont is well positioned to profit from it. I think much of my reasoning for buying it in December of last year still holds true. I'm certainly glad I subsequently sold it, but I think it'll soon be a good time to buy it back.

That's all the dogs. I think the financials are too scary, as are the drug makers and GM. I feel better about T and VZ, and I like DD and GE.


Disclosure: At the time of writing, I owned shares of GE. I also own shares of BlackRock's Enhanced Dividend Fund, which owns shares of AT&T, Bank of America, Citigroup, JP Morgan Chase, Pfizer, Merck, and Apple (not a Dog of the Dow). I most likely own the rest of the dogs through the fund, but they are not in its top 25 holdings.

Comments

[squashnut]

Another of the seemingly endless misleading Seeking Alpha headlines asking if it's time to buy finanacials where they left off a crucial word after the question mark: NO!

[BLANEY]

BIG ERROR IN FIRST SENTENCE OF THIS ARTICLE....IT STATES TO INVEST WHEN OTHERS ARE FEARFUL AND INVEST WHEN OTHERS ARE OPTIMISTIC..I THINK YOU MEAN TO SELL WHEN OTHERS ARE OPTIMISTIC. SOMEONE FAILED TO PROOF THE ARTICLE BEFORE GOING TO PRESS......

[bruin532]

You failed to mention GE's financial componant

[JonathanSwift]

I also noted the miscue in the early comments about timing of buys and sells. It might be tempting to excuse that kind of error because of the urgency of these daily posts... but it's not excusable! To be a creditable advisor one should give the impression of careful consideration of what is being evaluated and said. Poor proofreading is definitely not encouraging about overall judgement.

[lex]

Not yet. mkt hasnt bottomed. when guys like u throw in the towel then its the time to buy

[Keeping itReal]

ditto to what "squashnut" said

[Keeping itReal]

"lex" is on to you guys also

[notsosmart]

you have to be your own buffett.everyone has an agenda.dont believe analysts,ceos,bods.its sad but this whole situation has just turned into a slower vegas or casino.you cant believe our govt. on anything.even the printed facts & figures are skewed so that there are still plenty of enrons & world coms around.good luck.

[h2oworks]

I do not trust the bank dividends. WB sid they would not cut and now are thinking about making a second. There are more shoes to drop on these thousand leggers.

GE and T I own and would like to buy them on serious dips.

Do not know a lot about Dupont but what little I know agrees with your view.

I would not go near any of the others.

[frankiecooper]

sloppy writing. your first introduction of "highest yielding" stocks should mention "dividend". many people have no idea what "yielding" is. also - although its understandable that you might have concern over a company getting RID of its dividend (which would eliminate it entirely from the "dogs of the dow" list), once you start looking at each company, dissecting why you SHOULDN'T buy, you go against the whole idea of blindly following the DOGS of THE DOW rule. you don't buy "some" of the top 10 with the highest div. yield, cherry picking which ones you think may have trouble down the road. its simple - you buy THE TOP 10 HIGHEST DIVIDEND YIELDING companies on the dow. no need to re-invent the wheel. if you feel so inclined, change the name of your article to "picking stocks in the dow", since it seems as though you've thrown the whole "dogs of the dow" theory out of the window.....

congrats - you've come up with your very own 4 stock list (to be called the DOGS OF THE DOW it needs to include 10). your article ends up being a total waste of time.....

sheesh.

[pennystocks2008]

@h2oworks

"GE and T I own and would like to buy them on serious dips."

GE has lost 27 % of its value year to date. Its dip can hardly become more serious.

[CE]

Can't spell GrEat without GE. Do you think they will merge with Philips in the Netherlands to become the biggest biggest medical imaging, lighting, and all kinds of stuff.....GE is getting into water purification big time, teh Dutch know water very well it's a perfect match...the Dutch have been controlling the seas for centurys...

[JOETRADER]

CAN SOMEONE TELL ME WHEN IS THE BEST TIME TO BUY THE "DOGS OF THE DOW"? MY UNDERSTANDING IS THAT ONE SHOULD BUY AT THE BEGINING OF THE CALENDAR YEAR. IF THAT IS TRUE, THEN THIS ARTILCLE IS IRELLEVANT FOR THIS TIME OF THE YEAR.

[ecklebob]

Gee, Are the big time players buying these dogs? NO! They know this market is highly toxic waste. The only people "wondering" (ie pumping) if it's time to buy stocks are those who make a living off of people buying stocks.

[PrudentMan,CFA]

A stock that is out of favor with the investment community, a community that cannot even determine the value of their industry may be labeled by some as a "dog". That doesn't mean the company is a "dog".

If you cannot make a contrast between the stock and the business you may as well go to Vegas. You will be just as lucky.

[customer man]

Somethimes when you go bottom fishing you get hoooked

[oldtrdr]

frankie,

If a reader doesn't know what "yielding" means/refers to, wtf are they doing on this site? I have to agree with those who argue that the "Dogs of the Dow" theory precludes cherry-picking the list. It has always been my understanding that it was a simple, mechanical technique for investing....buying the top 10 yielders on, or about the first of the year, and selling the same at the end of the year....rinse, and repeat,

bruin....the author DID mention GE's exposure to the financial sector, via GE Capital.

jan

[paulk8756]

Of course, stocks have to BE IN the Dow to be the Dogs. Some of those mentioned here may not be there much longer!

[paulk8756]

GM, for one, can only stay if the Dow is expanded to include the world's largest debtor companies.

[paulk8756]

The financials have already lost in excess of 1/2 of their market caps.

GE is more curious. Owing to its sheer size, it seems unlikely the EU would allow it to combine with anybody. It appears more likely they're headed toward a new CEO instead, in an effort to recapture past glories.

[paulk8756]

Integrated oils will be added to the Dow once more, as they regain their position as some of the world's largest and most successful industrial companies.

[blah-blah]

The other commentor is right.

The whole point of the dogs of the dow is to take picking out of the equation. You buy all the warts and the idea is that you do well because turn arounds happen in spite of your emotions. If you are going to use your emotions and opinions, change the title.

[BlueDog]

BAC is the best pick of the group. I'm buying in scales over time. The CEO recently reassured Wall St. that the dividend will remain intact. But even if that is not the case for the short term, you're picking up a solid bank at a 50% discount. Writedowns from CFC are the big question mark, but this can be used as a tax write off for years to come. And if the Dodd-Shelby act passes, BAC stands to benefit greatly. There is risk, but I'm a buyer at this level. Remember, trying to pick bottom is a fool's game. It's best to buy in increments over time.

[jlounsbury59]

Devin Hobbes - - -

I suggest you ignore 90% of the garbage commentors have thrown at you. Your post is a useful discussion. Thanks

[contender]

Funny - thinking about the purity of the 'Dogs' equation, you have to think that information and nuance werent anywhere near as available when the strategy was hatched -- Id think pre-judging your picks to at least an extent would be warranted. Call the old strategy 'Dogs for Dummies' , call the new strategy 'New Dogs'.

Gotta change with the times...

Oh - and whats all the venom goin on here ? I find most articles here quite interesting reading, regardless of typos. My God some of you need to disengage your hate and engage your higher thought processes.

Maybe learning how to hedge, and switching to decaf might help too !

[RichardWendling]

This article in principle is correct. All the issues listed here should be considered for purchase, but remember they will take time to return to prominence. Also, those with high dividend returns can have their dividends cut. For more information on my thoughts on GM and other issues stated in this article click on my website and then click on the free stock reports section. It will take you to the reports on this issue and others and you can read my views for the short term and long term. It will cost you nothing except the amount of time it takes you to read the articles and other pertinent information you find on the site.

Thank you

Richard

[Will Rahal]

If you are buying, it 'd better be for a trade only. The market has confirmed the economic reality in which we have been in.

[frankiecooper]

"Oh - and whats all the venom goin on here ? I find most articles here quite interesting reading, regardless of typos. My God some of you need to disengage your hate and engage your higher thought processes.

Maybe learning how to hedge, and switching to decaf might help too !"

its called "being called on the carpet". there certainly ARE some good articles on seekingalpha, but its our job to police the writers who are delivering sub-standard writing. this particular article was sub-standard. should we sit around and praise every article simply because its printed??

[frankiecooper]

who ever said anything about hate, btw? i think YOU had better switch to decaf (tea, no less)

[mkreisel]

Buy what retails are bashing and sell what they are chasing.

They are always wrong, given 3-6 months time.

[g7enn]

or the past 20 years, GE Mortgage and GE Capital, now Genworth Financial have been misstating earnings and illegally swapping assets between their many companies to cover up their losses. If the rating companies knew of their fraud, they would be finished as a company. Shareholders, uniformed, don’t know of their deceipt and intentional manipulation of the numbers to meet quartely earnings projections. Their value is synthetic just like the trades they make throughout the world. Their marketing genius cannot cover up their desperation and failing companies. Indeed, the chickens have come home to roost!

By sandra stevens-miller on Jun 22, 2008

reggiemiddleton.bankim.../

[BlueSky&Sunshine]

I agree with BlueDog's opinion of BAC above. BAC didn't get into subprime or structured finance to anywhere near the degree that other big banks did. It's investment bank division never amounted to much. For the most part BAC has always been a plain vanilla CB catering to the middle class in a relatively conservative way. They've weathered the crisis well so far. They've already raised some additional capital, taken some large write-off's, and a vast abundance of bad news is priced in. And NO ONE will touch this thing right now - you'd think it was radioactive. Yes, the impact of CFC is unknown. But BAC has had months to perform due diligence. I suspect that CFC has spent the last several months refinancing every problem mortgage they could into mortgages either FHA insurable or eligible for purchase by GSE's - they've socialized many of their problems. I have a long position (as of 6/27) and expect at least 20% cap appreciation in the next year.

[curious cat]

i could'a' been a contender.