After a great start to the year with stocks up around 5% in January, share prices are now being challenged by the implications of the Coronavirus and its potential impacts on the Chinese economy, China-dependent businesses such as Apple and Caterpillar and even economies such as Australia, as well as the related listed businesses that could be negatively affected.
I’ve always argued here that a sell off this year was on the cards but because the global and US economies were on the up, thought it would be a buying opportunity. This virus challenge has added a negative variable I’m not sure about.
The strange viral-affected investing world right now has got me thinking about safer investing plays and something called the ‘Dogs of the Dow’ (DOD) strategy.
With this strategy, an investor annually reinvests in high-yield, Dow companies. The data from Dogs of the Dow suggests this has been productive.
Wikipedia says: “The logic behind this is that a high-dividend yield suggests both that the stock is oversold and that management believes in its company’s prospects and is willing to back that up by paying out a relatively high dividend. Investors are thereby hoping to benefit from both above-average stock-price gains as well as a relatively high quarterly dividend.”
Those who like this idea argue that blue chip companies cope better with serious market downturns and can keep their dividends relatively elevated because they can more easily access credit, can acquire companies in a downturn and have access to high-level managers.
Recall CBA picked up Bankwest and Westpac acquired St. George during the GFC. And both bigger companies did well in the dividend-department over the years following the 50% slump of the stock market.
Also, speculators often buy blue chip stocks after a big price fall. This helps the share price in ensuing years.
Research I found at www.dogsofthedow.com says for the 20 years from 1992 to 2011, the Dogs of the Dow matched the average annual total return of the DJIA (10.8%) and outperformed the S&P 500 (9.6%).
Further, the website revealed that “the Small Dogs of the Dow, which are the five lowest-priced Dogs of the Dow, outperformed both the Dow and S&P 500 with an average annual total return of 12.6 percent.”
And while this sounds good, the DOD strategy was smashed by being just long the Dow or S&P 500 via an ETF last year and did the same for a number of recent years. However, it doesn’t mean the DOD strategy is a dud for those who love and want dividends.
You might like the idea of this DOD strategy but as I read this, it made me think about the underlying strategy of my own Switzer Dividend Growth Fund. This is not meant to shoot the lights out, though it had a great year in 2019, but was still beaten overall by the S&P/ASX 200 Index.
Over the year, which was great for dividends due to Bill Shorten, his franking credits policy and the company reaction, SWTZ had a yield of 8.05% and 11.49%, if you include franking. Total return after fees for the twelve months to the end of January was 18.87%, which was pretty good for a dividend-chaser but it was an exceptional year.
That said, I never wanted it to be primarily a total return market beater but simply a reliable deliverer of dividend income that should give a bit of capital gain. This is becoming harder, as a lot of dividend payers have become expensive and this drives the percentage yield down.
That said, having a targeted goal of making a 4% net return from dividends, with capital gain on top and franking credits, is a pretty sensible way to go for lots of investors who don’t want to roll the dice on higher risk shares that could net great capital gains but could fall like a stone in a crash. This would be made worse if they were bad dividend payers.
Taking the ASX 200 top 30 stocks (like the 30 stocks in the Dow) and relying on some of the best dividend-payers, especially when they have had a bad year, doesn’t look like a dumb strategy for those of us who are trying to harvest dividends.
And companies such as Westpac, ANZ and NAB look like local DOD stocks. Telstra was in 2018 but it has a ripper of a 2019 and probably can’t be a dog stock this year.
FNArena thinks Westpac has 5.6% upside, ANZ 2.9% and NAB 5.3%. NAB’s forecasted dividend is 6.3% before franking, ANZ 6.1% and Westpac 6.3%, which makes them look attractive to cautious divided players, even if they were ‘dogs’ in 2019!
No one knows when this bull market will fall over. Before the Coronavirus, I was very confident that 2020 would be good for stocks. Right now, my jury is out. I’m not a virus expert, so I’m losing a bit of confidence, while remaining fully invested. That said, over time, I will be boosting my exposure to good dividend payers because if I miss the call on when the bull market is over, I want to know my stocks will be good dividend deliverers.
On tonight’s Switzer TV Investing programme, I will ask my experts to rate some local stocks that have had a chequered past to see if these dogs will have their day in 2020.
To watch the show, simply click here to go to our YouTube channel.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.