Dow Dogs Could be a Risky 2014 Play

ETF Trends

With the end of 2013 drawing near, some fans of the “Dogs of the Dow” strategy are eagerly awaiting year-end for confirmation regarding the next 10 dogs.

For those not familiar with the Dogs of the Dow theory, the long and short of it is building a portfolio of the Dow’s 10 highest yielders at the end of the year with the hopes of outperforming the index the following year.

The Dogs strategy has worked in previous years, but it could be running on fumes. “Companies have changed how they return cash to stockholders. Even if the strategy does retain a trickle of predictive power, a look at the stocks it’s likely to select for next year suggests they’re not especially dog-like, or cheap,” reports Jack Hough for Barron’s.

While the buybacks vs. dividend debate can go on all day, there is no denying U.S. companies are buying their own shares at a prodigious clip as the broader market rallies. There is also no denying ETFs such as the PowerShares Buyback Achievers Portfolio (PKW) and the AdvisorShares TrimTabs Float Shrink ETF (TTFS) have delivered for investors this year. [Market Shrinkage Boosts Some ETFs]

At the moment, the 2014 Dow dogs will likely be the following: AT&T (NYSE: T), Verizon (VZ), Merck (MRK), Intel (INTC), McDonald’s (MCD), Pfizer (PFE), Chevron (CVX), Cisco (CSCO), General Electric (GE) and Microsoft (MSFT).

AT&T and Verizon jump out because of the telecom sector’s reputation as a rate-sensitive group. That reputation has not mean the ETFs like the Vanguard Telecommunication Services ETF (VOX) have generated negative returns in 2013, but VOX and its rivals will likely trail the S&P 500 for the year.

Pfizer and Merck combine for over 16% of the Health Care Select Sector SPDR (XLV) , but the ETF has been a superior bet in 2013. Those stocks are both up more than 18%, but that is nothing compared to the 39.4% XLV has returned.

Plus, Merck is not the dividend raiser XLV’s largest holding, Johnson & Johnson (JNJ) is. Merck’s 2011 dividend hike was its first since 2004. J&J has a multi-decade dividend increase streak going.  In a testament of XLV’s strength, it has outperformed J&J by over 900 basis points in 2013. [XLV Moves Into Third Place Among Sector ETFs]

Investors that cannot decide among the Dow’s tech dividend dogs can consider the First Trust NASDAQ Technology Dividend Index Fund (TDIV) . Up more than 19%, TDIV crushed Cisco and narrowly beat Intel this year. Along with Microsoft, those stocks combine for 23.2% of TDIV’s weight.

First Trust NASDAQ Technology Dividend Index Fund

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Tom Lydon’s clients own shares of TTFS, Intel, Microsoft, McDonald’s, Pfizer and GE.

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