A Peek at the 2014 Dogs of the Dow

 | Dec 24, 2013 | 1:00 PM EST
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At the end of each calendar year, an investment theme that starts to take hold with many is the often touted "Dogs of the Dow" theory.

This theory suggests looking at the worst performing securities (technically, it calls for the highest-yielding securities, which usually means the price performance hasn't been great) in the Dow Jones Industrial Average in that given year. You then consider building a portfolio around them for the following year.

Even to a value investor, this approach presents some appeal. Value investors, after all, enjoy looking at depressed areas. What better place than to look for ideas than at the blue chips, some of the biggest and strongest companies around,

Just like any categorical investment theme, take the Dogs of Dow for what it is -- another way to find a potential opportunity. For example, at the end of 2011, Bank of America (BAC) was the worst Dow component after declining over 50%. In 2012, BAC shares were up over 120%. 

Thanks to a 27% plus surge in the DJIA this year, the 30 stock members that make up the Dow are having a marvelous year. In fact, year-to-date, there is only one Dow component that is in the red -- International Business Machines (IBM), which is down nearly 5% this year. IBM should be closely watched next year if for no other reason than Warren Buffett sunk $10 billion into the shares this year. Buffett also sunk $3 billion into ExxonMobil (XOM), another Dow laggard that yields 2.6%, but also happens to be buying back shares at a rate of 3.5% a year.

Another candidate is AT&T (T), only up 3% this year. Yet AT&T yields an oversized 5.4%, a yield that is close to rock solid. With the Fed pledging to keep rates low for a while, this dividend yield becomes more attractive as markets continue to heat up. Verizon (VZ), with its 4.4% yield is also a candidate -- its shares are only up 12.6% year to date.

McDonald's (MCD) was a laggard this year, up 9%, but the stock has a great run over the past several years. Not sure if the 3.4% yield is "enough" given where the valuation is today. Fellow consumer staple Coca-Cola (KO) is up 11%, technicallyadding it to the list. Perhaps most intriguing is Caterpillar (CAT), only up 1% this year.

If the markets take a turn in 2014, the high dividend payers like T, VZ, and even MCD could provide positive absolute performance. This idea of investing in the Dow laggards possesses appeal but like any other investment theme, the individual names should be evaluated closer.



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