Long-time investors are well aware of the “Dogs of the Dow” strategy. Generally speaking, investors buy the top 10 Dow stocks in terms of annual dividend yield, hoping to cash in at the end of the year on price and/or dividend gains.
The new ALPS Sector Dividend Dogs ETF (NYSE:SDOG) teaches an old dog a new dividend trick, advancing the strategy by taking the five highest-yielding stocks in each of the S&P 500’s industrial sectors. The end result: a very diversified pool of 50 stocks.
The strategy is all well and good; you’ll find tried-and-true dividend names in the index likes DuPont (NYSE:DD), Chevron (NYSE:CVX), Intel (NASDAQ:INTC) and AT&T (NYSE:T). These names populate SDOG much like they do a number of big-time mutual funds and ETFs.
Hidden among the gems, however, are some of the biggest barking dogs in the S&P — or any other index you can find. Yes, their dividend yields are high, and so they fit the ETF’s parameters. But really, do you want some of these woofers in your portfolio? For example …
Pitney Bowes
Pitney Bowes‘ (NYSE:PBI) founding fathers, Mr. Pitney and Mr. Bowes, still must be rolling their collective eyes as PBI struggles in a market that continues to shrink under the weight of newer technology and mail-delivery methods.
With a dividend yield of more than 11%, PBI is the leader in the industrials sector of the SDOG, but that yield has been enormously helped by a dwindling share price.
Dividends keep investors happy, but paying out $300 million in dividends on $900 million in cash flow won’t help in the long term. Revenues and profits are down over the last four-year stretch, and shares have dipped — no, sank — 41% over the past year, and 72% over the last five years. Arf!
Avon
It’s hard to find a turning point in the Avon (NYSE:AVP) story over the past seven or eight months, one where changes make a difference in stock price or perception.
Sheri McCoy — a former exec at Johnson & Johnson (NYSE:JNJ) — took over the cosmetics maker in April just after it rebuffed a $10 billion offer from Coty. That would-be acquirer gave McCoy and her team a little time to get used to the corner office and sweetened its bid by another $700 million ($1.25 per share). But McCoy quickly ran out of time, and the offer was dropped.
The net result: Avon is now in the SDOG as a consumer-staple entrant, sporting a 6% dividend yield and a share price of $15, still well below Coty’s offers. The stock is now down 14% for the last year and 62% over the last five years.
Avon’s first-quarter earnings were dismal, and the company still has a very long way to go as it battles Internet retailers and department stores. The cosmetics maker announces second-quarter earnings on Aug. 1, and it has missed estimates four times in a row. Look out if Avon misses again. It may become a permanent member of the SDOG club.
Pepco
I know, I know: I’ve been beating on these guys like an out-of-power maniac. But Pepco (NYSE:POM) never ceases to amaze, and it shows up as a utility sector representative in the SDOG because of its 6% dividend yield.
But Pepco is a dog. Having finally escaped (for now) the ire of an exasperated customer base, Pepco was just denied most of a hoped-for rate increase, mostly because of its continued equipment, manpower and customer-service woes, particularly after last month’s “deracho” event.
This can’t be good news for either Pepco or its shareholders (not to mention customers), and we’ll have to wait until it releases earnings on Aug. 7 to find out the total damages.
Luckily, management affirmed 2012 guidance and declared a dividend of 27 cents per share back in May. So, its place in the SDOG is on solid ground. At least until August, it’s the only thing keeping Pepco from the kennel in the backyard.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long INTC, JNJ, VZ and incredibly, PBI.
