A Dog Sometimes Is Better Than an Index

That's when the dog is one of the Dogs of the Dow, but let's see whether those dogs can outperform the Dow Jones Industrial Average again in 2023.

A strategy of investing in the highest-yielding dividend stocks on the Dow Jones Industrial Average beat the major indexes in 2022. Could that happen again in 2023?

The strategy, popularly known as the Dogs of the Dow, consists of buying the names with the highest-yielding dividends on the 30-stock index at the start of the year. Investors then purchase equal dollar amounts of the stocks and hold them for a full year.

The most popular version of this strategy consists of buying the 10 Dow stocks with the highest yields. Other variations include buying the five highest-yielding or top three yields, or even the one Dow stock with the highest yield.

If you had purchased the 10 highest-yielding Dow stocks at the start of 2022, you would have lost just 1.8%. Meanwhile, the Dow Jones Industrials lost 8.78%, the S&P 500 fell 19.44% and the Nasdaq Composite Index dropped by 33.10%.

Not only did the Dogs strategy outperform all the major indexes, it actually finished the year in positive territory once dividends are included.

Here are the 10 highest-yielding stocks that make up the Dow Jones Industrial Average, along with their yields as we enter 2023:

1. Verizon Communications (VZ) 6.62%
2. Dow Inc. (DOW) 5.56%
3. Intel (INTC) 5.52%
4. Walgreens Boots Alliance (WBA) 5.14%
5. 3M (MMM) 4.97%
6. IBM (IBM) 4.68%
7. Amgen (AMGN) 3.24%
8. Cisco Systems (CSCO) 3.19%
9. Chevron (CVX) 3.16%
10. JPMorgan Chase (JPM) 2.98%

Of the stocks listed above, which have the best-looking charts?

Since energy was by far the best-performing sector of 2022, it comes as no surprise that Chevron has a strong chart. However, while the stock finished the year with a two-week rally, investors should be aware that those gains occurred on low volume (shaded yellow).

Last year, Chevron gained over 52%. If a recession occurs in 2023, demand for crude oil could be hurt.

Chart Source: TradeStation

Next up is JPMorgan Chase, which fell 15.9% last year. JPM is getting strong support (shaded yellow) from its 50-day moving average (blue).

Chart Source: TradeStation

Finally, we have Verizon. This stock has been slowly, steadily grinding higher since late October. Verizon faces strong resistance at its 200-day moving average (red), currently located at $44.62.

Chart Source: TradeStation

Final thought: When interest rates rise, as they have for the past year, high-yielding dividend stocks tend to lose favor.

Because rates are expected to continue rising in 2023, I wouldn't be surprised if this strategy gets off to a slow start. Once the Fed nears the so-called terminal rate, improvement should occur.

Currently, the terminal rate is believed to be approximately 5.1%, but it could go higher if inflation persists. The current fed funds rate is between 4.25% and 4.5%. The next Federal Open Market Committee (FOMC) rate hike could be either 25 or 50 basis points, and should occur on Feb. 1.

At the time of publication, Ponsi had no positions in the stocks mentioned.