Recently, I came across a January 8, 2018 article by Mike Hulbert from MarketWatch which discussed the merits and limitations of the Dogs-of-the-Dow (DOD) methodology. The author goes on to recommend an alternate approach using Kelley Wright’s “Lucky 13 Portfolio” of dividend-rich stocks. This portfolio produced a 10.43% annual return for the 10 years ending 12/31/2017. In that article, one limitation is that the DOD approach does not consider the undervaluation or overvaluation of a stock. A suggested key metric in valuing a stock is the relative yield of that stock compared to its historical yield. Another factor for consideration is the likelihood of a stock having its dividend cut. Obviously, this would have a significant negative effect on the performance of a high-dividend stock. Both of these points are reasonable for high-dividend stocks.
The article goes on to mention GE’s -45% drop in 2017 as a cautionary case regarding dividend cuts. Fortunately, GE was never in the Dogs-of-the-Dow for 2017. Now that GE is a 2018 Dog, will this be the time to buy GE with its 50% dividend cut. Looking at relative yield, our data shows a 46-year average yield of 3.2% for GE. Since 2008, the average yield is also approximately 3.2%. GE was at a July 2016 high of $32.88 with a $0.92 dividend (2.80% yield). Following its 50% dividend cut in December 2017, GE reached a low of $17.25 with a $0.48 dividend (2.78% yield). Until investors are confident a dividend raise is coming, GE may struggle to rise above this level for some time. However, if GE can improve its balance sheet and inspire some optimism by late 2018, this may be the time to buy GE.
MarketWatch Article: These ‘Lucky 13’ dividend-rich stocks are better bets than the ‘Dogs of the Dow’
Readers familiar with our website already know that Michael O’Higgins Dogs-of-the-Dow methodology was a contributing factor behind the development of the DTRS approach. In reviewing Mr. O’Higgin’s original DOD findings along with over 25 years of subsequent data, it was noticed that this simple method had periods of outperformnce and other periods of underperformance. While fluccuating performance is to be expected with any investment approach, our approach using DTRS is to create a more balanced DOD method using up to 6 selection parameters rather than just 2 parameters. So how do the 10-year track-records for the 7 DTRS model portfolios stack-up against the “Lucky 13 Portfolio” and the DOD ETF?
Check out this total return chart (DTRS P-9.4 is the closest DTRS portfolio to the basic DOD approach):