'Wonder Dogs' and 'Underdogs': 2 Hot Diggity Twists on the 'Dogs of the Dow'

The Dogs of the Dow is a strategy that involves buying the 10 highest-yielding stocks in the 30-component Dow Jones Industrial Average at the start of the year. Two market experts and contributors to MoneyShow.com offer intriguing twists on this strategy -- one looks at a 3 Dogs approach while the other looks at Dow Underdogs. Brett Owens, Contrarian Outlook The idea behind Dogs of the Dow is that when you buy blue-chip stocks, high relative yields actually signal value. These firms may just be at the weakest part of their business cycles -- and ready to snap back. And investors who choose to jump in during 2019 will be shooting for their fifth straight year of market-beating returns. Blue chips are rarely cheap, so when there's a chance at a value, investors want to jump in. Not only do you enjoy yields on these stocks that are higher than usual, but you also get the upside of outsized gains as the stocks rebound. The 2019 Dogs of the Dow are: Merck & Co. : 2.9% yield Cisco Systems : 3.0% yield Procter & Gamble : 3.1% yield JPMorgan Chase : 3.2% yield Coca-Cola : 3.3% yield Pfizer : 3.3% yield Chevron : 4.0% yield Verizon : 4.1% yield Exxon Mobil : 4.6% yield International Business Machines : 5.2% yield The strategy has yielded an annual total return of 9.5% since 2001, compared to 7.3% for the S&P 500. Last year didn't look all that great, with a 1.5% loss, but it beat out 3.5% and 4.4% losses for the Dow and S&P 500, respectively (all those figures include dividends). That was good enough for the strategy's fourth consecutive year topping the broader market. But we did even better; by selecting the creme de la creme --- three of last year's top dividend dogs -- we generated an average total return of positive 8.8%. Let's dig into the Wonder Dogs that really stand out. Exxon Mobil Oil had a wretched 2018. The U.S. benchmark West Texas Intermediate Crude steadily climbed from about $60 per barrel at the start of 2018 to $76 in early October before plunging to a year-end close around $45. Unsurprisingly, Exxon Mobil -- the world's largest publicly traded oil and gas company by market cap -- struggled, too. Exxon shares delivered a total return of -18.3%. That's with its substantial payout. That said, the tide might be turning for oil and Exxon alike. Wall Street's pros spent December slashing oil-price estimates for 2019. But U.S. China trade-talk progress and OPEC production cuts are starting to spark some optimism. Exxon, meanwhile, laid out an aggressive growth plan in early 2018 to turn its operations around. The company believes it can more than double earnings between 2017 and 2025, projecting double-digit rates of return in all three segments of ExxonMobil's business -- upstream, downstream and chemical. Moreover, Exxon Mobil is paying a yield not seen since 1995. Its precipitous losses have juiced the dividend yield to historical highs in the mid-4% range. And your yield on cost is sure to only grow in the years ahead as Exxon, a Dividend Aristocrat, continues adding to its 36-year streak of annual payout hikes. Pfizer Pharmaceutical titan Pfizer was one of my three Wonder Dogs in 2018, and is a quality repeat choice in what could be an uncertain 2019. Lyrica -- Pfizer's $5 billion blockbuster drug that treats several indications including epilepsy and anxiety -- likely won't be one of the success stories. The drug has been steadily losing its exclusivity both here in the U.S. and in Europe, and in fact sales have been on the decline since 2015. But that's okay. Pfizer has replacement power. This year, Chief Operating Officer Albert Bourla will take over CEO duties from Ian Read, who will step down. Edward D. Jones & Co. analyst Ashtyn Evans, who has a Buy rating on Pfizer, says, It's the strongest pipeline they've had in a long time, so giving him the reins means innovation and new products will be their focus. Pfizer also reaffirmed its status as a safe-haven holding during 2018's fourth-quarter market implosion. While the market dipped about 14%, the shares dropped only 1.4%. That's thanks in large part to the company's wide drug portfolio -- which also includes over-the-counter consumer products such as Advil -- and a healthy dividend that yields more than 3%. That combination of safety and cash will be plenty welcome should 2018's turbulence bleed into 2019. Cisco Systems Cisco is an old school tech company that continues to reinvent itself while harvesting boatloads of cash from its legacy businesses. The firm is a digital utility for the Internet, collecting money from a host of related businesses including infrastructure platforms, software applications, security products and consulting services. Investors are always fretting about the firm's growth prospects, but you'd never guess it by looking at Cisco's results. Over the past decade, the company grew sales and free cash flow (FCF) per share by 55% and 70%, respectively: Yet investors flocked to hotter, younger tech names and left Cisco behind. The shares, while perennially cheap, continue to grind steadily higher thanks to a dividend that's now up more than five-fold since its 2011 debut. And Cisco is wisely transitioning many of its products to subscription models. Recurring revenue now accounts for 32% of the firm's total sales. It also has $5+ billion in deferred product revenue that it will be collecting in coming years as these subscriptions renew. The company is quietly turning itself into an internet-powered annuity! Cisco is able to generate gobs of cash this way ($13.7 billion in operating cash flow for fiscal 2018). The company's not shy about rewarding shareholders, either, buying back $17.7 billion worth of its own shares (boosted by its $67 billion cash repatriation in early 2018) and using another $6 billion to pay out dividends. Cisco also is getting more involved with cybersecurity, such as through its purchase of Duo Security, which provides two-factor security technology. Analysts see earnings growing at a nice 17% clip this year on a roughly 5% bump to sales. That -- as well as a 3% yield that's certainly on the high end of tech payouts -- makes Cisco a solid Dog to hitch your sled to in 2019. Chuck Carlson, DRIP Investor A favorite strategy of mine is to buy the Dow Underdogs, the stocks in the Dow Jones Industrial Average that have performed poorly over the last 12 months but are (hopefully) poised for rebounds. The strategy, which is featured in one of my books (Winning with the Dow's Losers), doesn't win every year. Indeed, General Electric was the Dow's biggest underdog going into 2018, and the stock followed a bad performance in 2017 with a terrible performance in 2018 and was subsequently booted from the index. Still, the strategy has worked fairly well over longer periods of time. Underlying the strategy is the idea of reversion to the mean, that the sort of blue-chip stocks that frequent the Dow typically have the ability to rebound following an extended period of underperformance. So what Dow stock represents the biggest Dow Underdog for 2019? It was Goldman Sachs ; the investment bank and financial-services firm was down roughly 34% last year. These shares have gotten worked over due partly to their sensitivity to financial-market performance. Also, the firm is embroiled in a legal battle with Malaysia over a government-controlled fund in which Goldman arranged financing. However, the stock appears to be discounting at least some of the potential troubles. Also, this strategy's risk is amped up by buying just one stock. A more conservative way to play the strategy would be to buy the five or 10 worst-performing Dow stocks and hold them for the next 12 months. The stocks below were the 10 worst performing Dow stocks in 2018. Goldman Sachs IBM DowDupont Caterpillar 3M Exxon Mobil United Technologies Chevron Travelers Home Depot Outside of Goldman Sachs, all of these stocks offer either a traditional DRIP or a direct-purchase plan.

'Wonder Dogs' and 'Underdogs': 2 Hot Diggity Twists on the 'Dogs of the Dow'

Selecting the creme de la creme of last year's top dividend dogs generated an average total return of 8.8%.

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