MRK Merck and Co Inc

By Steven Russolillo 

The "Dogs of the Dow" have suddenly lost their bite as the year winds down.

Yes, one of Wall Street's classic investing strategies is on pace to beat the Dow Jones Industrial Average for a fourth year in a row. But the outperformance has shrunk since Donald Trump's election victory as investors have shifted to growth from income-oriented stocks. And should the Trump administration enact lower taxes, less regulation and more fiscal stimulus as expected, the dogs could be in trouble in the new year.

The dogs strategy entails buying the 10 highest-yielding components of the Dow at the beginning of a year and holding them over the following 12 months. That means investors not only get dividend income but also the benefit of buying beaten-down stocks. Excluding dividend increases, yields rise when stock prices fall, highlighting the core of the dogs strategy. It has outperformed the Dow in 10 of the past 15 years and is on pace to do so again this year, according to Bespoke Investment Group.

In 2016, the dogs are up 17%, beating the Dow by almost 3 percentage points. But the divergence between before and after early November is striking: From the beginning of the year through the election, the dogs' 11% gain more than doubled that of the Dow. Since then, the dogs have risen about 5%, lagging the blue-chip index by four percentage points. Three of the Dow's four biggest gainers this year -- UnitedHealth Group Inc., Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. -- aren't dogs.

The dogs approach mimics what was the hottest trade in the first half of the year: chasing yield. Many of the market's top-performing sectors earlier this year, such as utilities, telecom and consumer staples, sported the highest dividend yields. That trend hit the skids in the third quarter, with declines accelerating following the election.

Still, all 10 dogs are up in 2016, led by Caterpillar Inc. and Chevron Corp. which have each rallied by more than 30%. Pfizer Inc. has been the worst of the bunch, only slightly positive for the year. Three dogs are down since the election -- Merck & Co., Procter & Gamble Co. and Cisco Systems Inc.

Currently, eight of the 10 dogs this year would stay the same in 2017. Merck and Wal-Mart Stores Inc. would be dropped from the list, replaced by Coca-Cola Co. and Boeing Co., whose yields have risen. Coke is one of only two Dow components that are in the red for the year. Nike Inc. is the other but its 1.4% dividend yield is far lower than the average 3.4% yield among the 10 current dogs.

The dogs aren't always so loyal. They lagged behind the Dow from 2007 to 2009 and again in 2012. If the growth trade has legs, the dogs could get muzzled again in the new year.

(END) Dow Jones Newswires

December 28, 2016 02:47 ET (07:47 GMT)

Merck (NYSE:MRK)
Historical Stock Chart
From Mar 2024 to Apr 2024

Merck (NYSE:MRK)
Historical Stock Chart
From Apr 2023 to Apr 2024