Introduction

It’s a New Year and time for the Dogs of the Dow, which is one of the longest running and easiest to implement strategies.

The Dogs of the Dow is a stock picking strategy devoted to selecting the highest dividend paying stocks in the Dow Jones Industrial Average. Yield is the annual dividend from a company divided by its stock price. The higher yields of the “Dogs” signal that their stock prices have declined the most among the Dow’s 30 blue-chip companies. In essence, the goal of the strategy is to earn more dividend income and hope that the stocks also mount a comeback. The Dogs are bought on the first day of the year and sold on the last day of the year.

Traditionally, the Dogs of the Dow invests in the 10 highest yielding stocks; there is a variant, known as the “Small Dogs”, that invests in the 5 highest yielding and lowest priced stocks. This column will follow the “Small Dogs”.

This year’s Small Dogs are:

ATT (symbol: T)
Pfizer (symbol: PFE)
General Electric (symbol: GE)
Intel Corporation (symbol:INTC)
CSCO: (symbol: CSCO)

Here is a table showing the total returns for various calendar years ending December 31, 2011. What should be noted is that this strategy is NOT protective during a bear market. See the 2008 column. Of note, the traditional Dogs of the Dow (10 stocks) out performed the Dow Jones Industrial Average by 700 basis points in 2013.

Dogs of the Dow Returns

Performance

We will look at 2 portfolios in this column, and both will utilize the 5 stocks in the “Small Dogs”. The first portfolio will be passive and reflect the normal buy and hold philosophy of the original strategy. For book keeping purposes, this strategy will utilize the opening prices from the first trading day of the year (January 2, 2014). This is table 1 below. This passive portfolio was started with $99,992.71, and each equity has received a 20% allocation.

Table 1. Small Dogs/ Passive Strategy

The second portfolio is active and we will attempt to improve our returns through more timely entries and exits. This will be the thrust of the analysis in this column. This active portfolio will start with $100,000, and these positions will be discussed in the following pages. Unless otherwise stated, all charts used in this analysis will be on a weekly time frame.

The Small Dogs Passive Strategy is outperforming the Dow Industrials by nearly 350 basis points. The Small Dogs Active Strategy is outperforming the Passive Strategy by almost 350 basis points. All active strategy positions are outperforming their passive strategy counterparts. Volatility in the active strategy has been much lower.

As per last week’s instructions we added a position in PFE as it broke down to support at 29.38.  However, prices closed below support, so we exited this position with a 1.19% loss or about $400.  The portfolio has been adjusted to reflect this brief position and loss.

Table 2. Small Dogs/ Active Strategy

ATT (T)

1) A breakout above 35.77

2) This is now support and a close below this level would be reason enough to sell

Pfizer (PFE)

1) Did we say “double top” 4 weeks ago?

2) Support was at 29.38 but it is now resistance

3) Places to be a buyer: 28.27 support or a close above resistance at 29.38

General Electric (GE)

1) We were buyers at 24.68

2) A weekly close below 24.68 is a reason to be a seller

3) This is our second go around with GE

Intel (INTC)

1) We were buyers at the 24.43 support level

2) We become sellers on a weekly close below the 25.85 support level

3) A close below 25.85 is a double top

CSCO (CSCO)

1) CSCO broke support at 21.58 and then quickly recaptured this level

2) 21.58 is support