Top-Dog Dividend Stocks For 2016

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January 4, 2016 12:57pm NYSE:DOD

Wall streetMike Burnick:  With 2015 ending tonight at the stroke of midnight, it was a lackluster year for stocks. The Dow Jones Industrial Average is on track for a decline of 0.8% this year (as of Wednesday’s close). Meanwhile, the small-cap Russell 2000 Index is down nearly 4% year to date.

But at least one time-honored dividend stock strategy paid off again for investors this year: the venerable Dogs of the Dow strategy found the scent in 2015 with a year to date gain of 4%, easily edging out the Dow Jones Industrials’ overall return!

So will the Dogs of the Dow lead the pack again in 2016?

As a refresher: The Dogs of the Dow strategy suggests buying the 10 highest-yielding stocks from among the 30 stocks in the Dow Jones Industrial Average each year.

It’s a simple set-and-forget strategy because it involves just one portfolio rebalancing each year on the first trading day of January, or before today’s close if you want to get out ahead of the pack.

Yet this easy to follow stock strategy has produced market-beating results over the long term.

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The theory is that many of the highest yielding stocks in the Dow get that way in part due to a depressed share price, boosting the stock’s dividend yield in the process.

Eventually, mean-reversion kicks in and depressed stocks rise back near the top of the heap, producing market-beating results along the way. Meanwhile, you collect rich dividend income while you wait for stock appreciation.

Dogs will be dogs at times and this strategy doesn’t always beat the market, but in mostly sideways, trading range markets, like this year, the extra dividend yield provided by the Dogs can make this strategy best-in-breed.

These Dogs can hunt well over the long run, too.

The folks at Dow Jones created an index to track the Dogs strategy. And over the past five years, the Dogs have easily outrun the overall stock market with a gain of 97%, while the Dow Jones Industrials have gained just 53%.

In the table below, you’ll see which Dow stocks made it into the dog pound for the year ahead …

Although there are only 10 stocks on the list, it’s a pretty diversified group of household names from a wide variety of industries both cyclical and defensive. The average dividend yield for the 10 top Dogs is a whopping 3.75%, which is well ahead of the 2.5% average yield for the Dow 30 Industrials.

There are several pedigree stocks in the hunt for 2016, but several mutts too.

As you can see, Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT) and Coca-Cola (NYSE:KO) make the cut and have often been repeat performers on the Dogs list. All three blue-chips are part of the consumer staples sector and are considered defensive stocks to own in volatile markets. And all three have yields above 3%, which means they produce more annual income than a 10-year Treasury Bond!

Also making the grade from the defensive health-care sector are blue chips Pfizer (NYSE:PFE) and Merck (NYSE:MRK), both of these pedigree stocks have rich dividend yields above 3.4%.

And now for the real dogs  …

Not surprising, there are two energy stocks on the list: Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). Both “earned” their entry to the 2016 dog pound with horrible returns this year; down 15.8% and 11.9%, respectively. Note: Wal-Mart was actually the worst performing Dow stock this year, down 27.3%.

After oil prices collapsed this year, all energy stocks took a pounding. And there is concern that plenty of energy stocks will fall into financial trouble in the New Year. These two blue chips have staying power, but it’s possible that the rich dividend yields of 4.7% and 3.7%, respectively, could get cut in 2016.

Rounding out the list are Verizon (VZ — 4.7% yield), Caterpillar (CAT — 4.3%) and International Business Machines (IBM — 3.6%). These black-and-blue chips have a long history of paying dividends, but all three also carry lots of debt on their balance sheets, which could endanger the dividends at some point.

Aside from owning the individual stocks on this list, there are also a few ETFs available that track various dividend investment strategies, including one: The ELEMENTS Dogs of the Dow ETN (NYSEARCA:DOD), which tracks the Dow Jones High Yield Select 10 Index, which includes all the Dogs in a single trade.

Remember, investing isn’t all about capital appreciation, dividends still matter! This is especially true when appreciation is hard to come by as it was in 2015.

All of the stocks on the list above have significantly higher yields than the benchmark 10-Year Treasury. Plus, you can expect dividends to grow over time. In fact, over the long run almost HALF the total return from stocks comes from reinvested dividends alone.

Bottom line: Focusing on dividend paying stocks can be a rewarding conservative growth strategy for long term investors. The Dogs of the Dow may not always be an investor’s best friend, but it’s a user-friendly strategy worth considering for a portion of your portfolio.

This article is brought to you courtesy of Mike Burnick.

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