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Dow Dogs - Time for Soup: CVX, DD, GE, JNJ, KFT, MCD, PFE, T, VZ

January 03, 2011 | About:
wax

wax

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Over the last couple weeks, we have noticed a several articles about the Dogs of the Dow, an investment strategy in which, on the first trading day of the new year, the ten stocks from the Dow Jones Index that had the highest dividend yield during the prior year are purchased and held for one year.

The next year, the same thing is done, with any stocks not in the top ten for the year, being replaced with the stocks that were.

The focus here is on the dividends the company pays rather than the earnings growth or price appreciation. In simple terms, the idea is to buy stocks that will not only pay good dividends, but will maintain pricing levels over the course of the coming year.

If followed the way it is designed, we think the strategy is silly. Why would investors want to invest in a strategy that requires the stock price to fall for their investment objective to increase?

While not the sharpest pencils in the drawer, we just think such an investment strategy is flawed from the get go.


By way of example, we took the stocks we found listed in the 24/7 Wall St. site article titled Meet the 2011 Dogs of the Dow, and sort of worked through them.

Basis

At Wax Ink, all of our valuation work is based on audited financial information as taken from a company's most recent SEC Form 10-K filing, which, in the case of the companies listed here, means the FY09 data, is the latest audited data available.


The Suggested Stocks


Chevron Corporation (CVX) The stock closed recently at $91.60.
Based on unaudited FY10 financial information, the dividend yield was 3.2%, and the stock has a target price of $94.88. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 2.88%, and a reasonable value of $68.00. The stock price also increased 14% during 2010.


E.I. DuPont de Nemours and Company (DD) The stock closed recently at $49.69.
Based on unaudited FY10 financial information, the dividend yield was 3.3%, and the stock has a target price of $54.80. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.3%, and a reasonable value of $37.00. The stock price also increased 46% during 2010.


General Electric Company (GE) The stock closed recently at $18.25.
Based on unaudited FY10 financial information, the dividend yield was 3.1%, and the stock has a target price of $21.00. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 4.6%, and a reasonable value of $32.00. The stock price also increased 1% during 2010.


Johnson and Johnson (JNJ) The stock closed recently at $61.95.
Based on unaudited FY10 financial information, the dividend yield was 3.5%, and the stock has a target price of $67.84.Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.1%, and has reasonable value of $52.00. The stock price also decreased 5% during 2010.


Kraft Foods, Inc. (KFT) The stock closed recently at $61.95.
Based on unaudited FY10 financial information, the dividend yield was 3.5%, and the stock has a target price of $67.84.Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.1%, and a reasonable value of $52.00. The stock price also increased 15% during 2010.


McDonald's Corporation (MCD) The stock closed recently at $76.76.
Based on unaudited FY10 financial information, the dividend yield was 3.2%, and the stock has a target price of $86.00. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 2.6%, and a reasonable value of $48.00. The stock price also increased 22% during 2010.


Pfizer, Inc. (PFE) The stock closed recently at $17.51.
Based on unaudited FY10 financial information, the dividend yield was 4.6%, and the stock has a target price of $21.23. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.9%, and a reasonable value of $27.00. The stock price also decreased 8% during 2010.


ATT, Inc. (T) The stock closed recently at $29.38.
Based on unaudited FY10 financial information, the dividend yield was 5.9%, and the stock has a target price of $30.93. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 5.5%, and a reasonable value of $38.50. The stock price also increased 3% during 2010.


Verizon Communications, Inc. (VZ) The stock closed recently at $33.24.
Based on unaudited FY10 financial information, the dividend yield was 5.5%, and the stock has a target price of $33.24. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 5.0%, and a reasonable value of $43.50. The stock price also increased 8% during 2010.


Final Thoughts

As we said earlier, we think the Dogs of the Dow investing strategy is silly. Where would investors in Johnson and Johnson, and Pfizer, be had these companies not been among the top 10 dividend yielders during 2010?

According to the strategy, investors would sell these stocks, and replace them with other Dow stocks. But they would have sold them at a loss.

Also, considering the price gains for many of these stocks during 2010, it seems to us that investors are simply betting that at the end of the year, stocks like DuPont for example that had an increase in price during 2010 of 46%, will at the very least maintain all of their 2010 price gains, and end 2011 among the highest dividend yielding stocks in the Dow Index.

Somehow we don't think the odds are real favorable for that to occur, but then who knew Kibbles and Bits would be such big seller?

Wax


About the author:

wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

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