Why 2021 could be the year of the Dow dogs

There’s more to the market than the FAANG stocks of Big Tech. It could finally be time for dividend-paying value stocks like the so-called dogs of the Dow to shine.

The dogs of the Dow refers to a list of high-yielding stocks in the blue-chip average. The theory is that if investors buy these stocks, many of which had struggled in the previous year but still offer the promise and stability of a big dividend, they should mount a solid comeback in the year to come.

As investors bet on more stimulus, an economic recovery and an eventual winding down of the Covid-19 crisis thanks to vaccines, dividend-paying value stocks might be due for a comeback.

This year’s Dow dogs list includes Chevron, IBM, Dow, Verizon and Walgreens. Several of these stocks are off to a hot start in 2021.

Walgreens has already surged 20% following a solid earnings report last week. Chevron and Dow are benefiting from a jump in commodity prices. IBM has rallied after hiring former Goldman Sachs president and ex-Trump economic adviser Gary Cohn as its new vice chairman.

“We’re seeing this rotation into value stocks now after they had been slow to recover,” said Paul Axberg, management analyst at Axberg Wealth Management in an interview with CNN Business.

“Oil is picking up and dividends may no longer be out of favor. Investors may be looking more at underperforming categories in the market,” he added.

Bond yields still pretty low

The fact that Treasury bond yields, despite a recent spike, remain near historically low levels should bode well for the Dow dogs.

The US 10-year bond yields just 1.16%. So investors craving steady income in a still uncertain world may flock to companies like IBM, Verizon and Walgreens, which all pay dividends north of 4%.

Of course, there is no guarantee that this year’s dogs will beat the market. in fact, last year’s dogs performed like, well, dogs.

Most of these stocks did so poorly that they are back on the dogs list this year. 3M, Cisco and Coca-Cola are all Dow dogs this year, just like in 2020. Amgen and Merck are the only two new Dow dogs, replacing Exxon Mobil, which was booted from the Dow last August, and Pfizer.

But the strategy of buying top dividend payers in the Dow has fared better over the previous few years. The Dow dogs outperformed the S&P 500 from 2015 through 2018. The dogs were up about 20% in 2019 too, a solid gain — but not as strong as the broader market’s more than 30% jump.

So dividend payers and other value stocks could rebound this year — especially if the economy and job market slowly returns to normal.

“There is an anticipation that we will get a cyclical upswing and that more of the economy will start to bounce back. Stocks that were beaten down last year should recover over the near term,” said Mark Hamilton, chief investment officer at Hirtle Callaghan, to CNN Business.

Hamilton added that unless interest rates spike dramatically higher, value stocks, and dividend payers in particular, remain attractive.