The following commentary was originally sent to subscribers of Dividend Stock Advisor at 2:29 on Dec. 28. Click here to learn more about this income, portfolio and market information service.
Owning the "Dogs of the Dow," a popular dividend strategy, has been a lucrative investment in 2016. The 10 highest-yielding names in the Dow Jones Industrial Average have returned more 20% year to date (including dividends) and outperformed the overall index of 30 companies by more than three percentage points.
Caterpillar (CAT) and Chevron (CVX) have been the big winners in 2016, both gaining more than 30% year to date. On the other hand, model portfolio holding, Pfizer (PFE) was the laggard of the group, posting a flat return year to date, before dividends.
When the list of Dogs is rebalanced for 2017 at the end of this week, it appears that Boeing (BA) and Coca-Cola (KO) will replace Merck (MRK) and Walmart (WMT) . The other five remaining holdings in the strategy are Cisco Systems (CSCO) , Exxon Mobil (XOM) , IBM (IBM) , Procter & Gamble (PG) and Verizon (VZ) .
Of the names in the Dogs strategy, in addition to Pfizer, which is already held in the model portfolio, Cisco stands out as the most attractive stock at current levels. The shares have gained 12% year to date, recently traded around $30.40 and also sport a solid 3.4% dividend yield.
The telecom equipment giant can cover its quarterly dividend of $0.26 a share 2.3x with expected fiscal 2017 (ending July) earnings of $2.37 per share. Investors at the close of trading on Jan. 3, 2017 will qualify for the next payment on Jan. 25, 2017. The company also has a strong balance sheet, with twice as much cash as debt and we believe there is room for management to boost the dividend in the first quarter of the new year.
As for Pfizer, management already increased its quarterly dividend earlier this month to $0.32 a share (3.9% yield). Investors at the close of trading on Jan. 31, 2017 will qualify for the latest payment on March 1, 2017. The drug-maker has raised the payout eight straight years and can cover the dividend 2x with expected 2017 earnings of $2.61 per share.
Even though Pfizer lagged the broader market in 2016, we believe the shares offers investors both attractive growth and income potential, even if trading volatility increases in 2017.