In this post, we will look at the performance of the Dogs of the Dow 2023, but first, here is our disclosure.
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Dogs of the Dow Strategy
The Dogs of the Dow investment approach aims to invest in undervalued blue-chip companies based solely on their dividend yield. At the end of each trading year, the top ten companies with the highest dividend yields in the Dow Jones are selected, and equal amounts are invested in each at the beginning of the following year. This process is repeated annually, with stocks being replaced as necessary.
I learned about the Dogs of the Dow investment strategy and decided to try it out for myself. The approach involves purchasing shares in established, high-yield blue-chip companies, which sounded like a secure option to me. To test the method, I invested $1,000 into each of the following companies: Verizon, Dow, Intel, Walgreens, 3M, IBM, Amgen, Cisco Systems, Chevron, and JP Morgan, at the beginning of the year.
This is what Crash Test Money is all about. We actually have a stake in the game. I am not here to sugarcoat anything, including my returns using the Dogs of the Dow strategy. So far, this strategy has not been doing too great.
Check out my post on the Dogs of the Dow 2023 for a more in-depth look at this strategy.
Dogs of the Dow returns, Q1, 2023
The Dogs of the Dow have experienced a disappointing start to the year 2023. Their performance fell short of my initial expectations. Although I was hopeful at the beginning of the year, I am now uncertain whether this strategy can consistently outperform the basic approach of investing in a low-cost ETF or index fund that mirrors the S&P 500.
As of the end of Q1, the Dogs have seen a yearly decrease of roughly 5%. However, if you factor in their average yearly dividend, then they are flat so far in the year. Although this may not appear too concerning after a down year, it pales in comparison to the S&P 500’s 7.5% gain. The situation worsens upon discovering that only 3 out of 10 stocks had positive returns in the first quarter, with only 2 outperforming the S&P 500. Despite this, I am not quick to judge this as a terrible year for the Dogs just yet, as the initial dividend payouts are still pending.
The Dogs of the Dow boast an impressive average dividend yield of over 4%. Dividend payouts will commence in April, and I plan to reinvest them back into the Dogs of the Dow. By reinvesting the dividends, I can decrease the cost basis, which will positively affect stock returns. As the year progresses and the dividends start flowing, I am hopeful that things will begin to look up.
Let’s take a deeper look at the stock returns for Q1 2023. To make it easier, I have categorized them into three groups: the good, the bad, and the ugly. Let’s start with the ones that performed well.
The Good
Despite only three stocks falling under this category, their strong performance lifted up the other underperforming stocks, resulting in a slight gain in Q1. Outside of these three stocks, there was not much else to celebrate as it was a disappointing quarter for the Dogs of the Dow. The standout company that led this growth was Intel, which was a surprise.
Intel: 22.22%
During the first quarter, Intel emerged as the top performer, surpassing all other competitors and exceeding the S&P 500. In just the month of March, Intel experienced an impressive 31% growth rate, which caught me off guard. As a major player in the chip manufacturing industry, Intel is subject to its cyclical nature. Success or failure can fluctuate drastically. In comparison to other semiconductor companies, Intel’s track record has been unimpressive, resulting in a 66% reduction in dividends in February.
We are only two months into 2023, and Intel went from having one of the highest dividend yields to one of the lowest in the Dow Jones. Intel started 2023 with a dividend of over 5% and is now down to 1.5% after its dividend cut. Intel would have never made it into the Dogs of the Dow if it had started the year with a 1.5% dividend yield. But here we are, and the dividend cut may have helped propel the stock.
In February, Intel made the decision to cut its dividend, which resulted in a 31% increase in its stock value during March. This move demonstrated to investors that Intel is committed to improving its performance. While the dividend cut will likely lead to a boost in funds for innovation, I remain unconvinced.
Ultimately, I think Intel was an opportunity play, considering Intel is expected to report big year-over-year declines in Q1. That was the trend throughout 2022, with Q4 year-over-year earnings down 90%. That is not a typo. Some analysts believe the chip and semiconductor industry has bottomed, and Intel’s stock has reached its floor. I guess people must have felt it was too cheap to pass up. It is going to be interesting to see where Intel goes from here.
Cisco Systems: 9.05%
I am not surprised by Cisco Systems’ performance so far this year, as it closely tracks the ups and downs of the S&P 500. Cisco Systems is a solid and reliable tech company responsible for making the hardware and software that runs the internet. You are using its products right now while reading this blog.
Cisco operates without the glitz and glamour of other high-flying tech companies. I anticipate steady gains and minimal losses from this company. However, the way things are going for the Dogs of the Dow, I expect more downside than upside. I am curious about how the stock price will respond to an economic slowdown, but only time will reveal the answer.
Dow Inc: 7.41%
In the first quarter, Dow Inc managed to yield positive returns and nearly kept up with the S&P500, making it the last Dog of the Dow to do so. With this performance, coupled with its 5% dividend, there is potential for Dow to offer a satisfactory rate of return for the year. Additionally, I like that Dow Inc’s price-to-earnings ratio is currently below 9, which could make it a promising option for value investing.
The Bad
During Q1 of 2023, there were several underperforming stocks that I categorized as “bad dogs”. However, I must admit that I was being generous by placing six companies in this category. Chevron, Walgreens, IBM, and Amgen could have easily been placed in the ugly category since they trailed the S&P 500 by over 10%. However, 3M was so horrible that I decided to list it all by itself. So, Chevron, Walgreens, IBM, and Amgen were spared and grouped with Verizon and JPMorgan.
Verizon: -3.07%
One of the biggest telecom companies in the US, Verizon, has been facing tough times lately despite having a large dividend and offering 5G services. Unfortunately, Verizon has been experiencing a downward trend for several years now. 2022 was not kind to the company as it continued to lose customers. It remains to be seen if this trend will continue when Verizon reports its first-quarter earnings.
JPMorgan Chase: -3.56%
The banking sector was severely impacted by the collapse of Silicon Valley Bank, with even the biggest player, JPMorgan Chase, feeling the effects. Banks are now facing scrutiny not seen since 2008. The Fed’s aggressive fight against inflation has not helped the situation. Hopefully, the worse is now behind us, and JPMorgan Chase’s stock can deliver positive returns in the second quarter.
Chevron: -6.22%
Chevron had such a strong showing in 2022 that it seems inevitable it would eventually come down to earth. There is no doubt that Chevron’s stock did not have a strong quarter, but Chevron is coming off a massive 2022, where it gained over 50% on the back of higher energy prices. Can Chevron continue to deliver blowout earnings in 2023 now that oil prices have cooled? If so, then its stock price may see better days ahead.
Walgreens: -6.77%
I must say, the Dogs of the Dow strategy compelled me to invest in this stock, which I would have never considered otherwise. Despite its 5% dividend, Walgreens’ underwhelming performance in the past five years did not attract my interest. The stock’s performance in Q1 was also quite disappointing. However, I am hoping for a positive turn of events before the year ends. Until then, I will hold off on forming any further opinions.
IBM: -7.39%
IBM is a lot like Walgreens for me. It is not a stock I would normally be interested in. IBM’s stock price tends to remain stagnant, and the primary draw of investing in IBM is the approximately 5% dividend. As an income investor, I wouldn’t mind having this stock in my portfolio. However, the Dogs of the Dow approach utilizes dividend yield to pinpoint undervalued blue chip companies that have the potential for growth, not just for generating income.
Amgen: -7.61%
Although Amgen’s stock returns were lower than expected in the first quarter, I believe this stock has great potential compared to other Dogs of the Dow. Amgen is a well-established biopharmaceutical company with a track record of delivering positive stock returns over time. Despite a rocky start to the year, Amgen’s stock has rebounded and has been trending upward since March. I am hopeful that Amgen will not remain at the bottom of the Dogs of the Dow 2023 list for very long.
The Ugly
3M: -14.17%
The Q1 stock performance of 3M leaves much to be desired as it has underperformed the S&P 500 by more than 20%. Over the last five years, excluding dividends, 3M’s stocks have gone down by more than 50%, while the S&P 500 has seen an increase of over 50%. Given the company’s wide range of products, it’s difficult to fathom their poor performance.
You may be aware of 3M’s popular consumer items such as Post-it notes and Scotch tape. However, the company offers over 60,000 products. A significant portion of their products are utilized in various industries at the commercial level. Its performance is even more baffling because its earnings remain pretty stable with such a diverse offering.
In recent years, there has been only one instance of 3M failing to meet its earnings per share target. However, it is worth noting that the company’s year-over-year earnings have experienced a consistent decline. Given the significant size and importance of 3M, there is a certain level of expectation that it will be able to navigate this downturn.
What needs to happen for 3M stock to finally see an upward trend? Given its size and importance, one would assume that it has the capacity to bounce back from its financial setbacks. This all leads me to the ultimate question: Is there a limit to how low it can go?
On to Earnings, Dividends, and Q2
At the moment, I’m uncertain about the effectiveness of the Dogs of the Dow approach. I have concerns about the potential effects of inflation on companies that pay dividends. When interest rates on savings were extremely low, individuals had little choice but to invest in dividend-paying stocks to compensate for their meager earnings. Nowadays, savings accounts offering over 4% interest and CDs with over 5% interest are readily available. Consequently, there is a shift of funds from dividend-paying stocks to safer accounts.
There are two upcoming events that will provide us with valuable insights into the future direction of these companies. These events are the earnings report and the dividend payouts. By analyzing the Q1 earnings report in April, we will be able to obtain a clearer understanding of the financial stability of these companies. Additionally, the first dividend payouts will play a significant role in enhancing overall returns.
It’s too early to determine how well the 2023 Dogs of the Dow are doing since there’s still a lot of time left in the year. Hopefully, we’ll see more companies doing well by the end of the second quarter. I’ll be sure to update you on my progress then.
