All posts by Pat McKeough

We Don’t Recommend the Dogs of the Dow Investing Approach: Here’s Why

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Here’s a Look at the Dogs of the Dow Investment Strategy

1. The Traditional Dogs of the Dow Approach

Photo by Pexels/Arwa Askafi

The Dogs of the Dow approach involves buying the highest-yielding stocks in the Dow Jones Industrial Average. It’s based on the idea that a high dividend yield is an indicator of an undervalued stock.

To apply this approach, at the end of each year, you pick the 10 stocks with the highest dividend yields from the 30 stocks that make up the Dow index.

You then invest an equal dollar amount in each of these 10 stocks and hold them for one year. You repeat the selection process and re-jig the portfolio at each year-end.

In theory, these stocks should outperform the market (the DJIA or the S&P 500).

2. The Small Dogs of the Dow Approach

In another variation, you pick the 10 highest dividend-yielding stocks, then select the five with the lowest stock price. Invest an equal dollar amount in each of those, hold them for a year, and repeat. This variation is known as the Small Dogs of the Dow, or simply The Dow 5.

Here’s a Dogs-of-the-Dow ETF

The ALPS Sector Dividend Dogs ETF (symbol SDOG on New York) follows its own version of the Dogs-of-the-Dow strategy. It picks five stocks with the highest dividend yields from each of the 10 sectors of the S&P 500 index. These sectors are consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunication services, and utilities.

Each holding begins with roughly the same dollar value, so every company starts out with a similar influence on the ETF’s total return. The end result is a portfolio of 50 large-cap stocks.

Currently, the fund now holds a number of stocks we recommend as buys for subscribers of our Wall Street Stock Forecaster advisory. They include AT&T, Verizon, Kraft Heinz, Snap On, 3M, Newmont Mining and IBM. However, the ETF also holds a lot of stocks we don’t recommend.

Should you Follow the Dogs of the Dow Approach?

One best-selling book of the early 1990s advised investors to buy the Dogs of the Dow: the lowest-priced, highest-yielding Dow stocks. Followers of the approach made money. Of course, anybody who bought stocks in the early 1990s made money.

The Dogs of the Dow strategy worked well in the 1990s because interest rates were going down. This tended to raise all stock prices. But high-yielding stocks were affected more than most because they attracted bond investors who were switching into stocks.

That’s how things work with most formulaic approaches: Sometimes they seem to add value, because they happen to lead you to invest in stocks that were likely to go up for some reason other than the formula’s actual focus.

Of course, you also need to keep in mind that high yields can signal danger, rather than a bargain.

All in all, we don’t recommend the Dogs of the Dow strategy.

Here’s why high yields can be a danger sign

To reiterate: a high dividend yield may be a danger sign. It may mean insiders are selling and pushing the price down. A falling share price makes a stock’s yield goes up (because you still use the latest dividend payment as the numerator to calculate yield: but the denominator, the price, has dropped). But when a stock does cut or halt its dividend, its yield collapses. Continue Reading…

Stock Market Anxiety leads to Bad Investing Decisions. Here’s what to do instead

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Ignore stock market anxiety and negative stock predictions and instead focus your investing strategy on diversification and portfolio balance

Image by Pexels/Markus Spiske

The current state of the world is generating stock market anxiety, as it often does. My guess is that the Israel-Hamas war is just getting started and will last a long time. I also suspect that Russian dictator Vladimir Putin had something to do with getting it started, and will do what he can to keep it going. After all, when it comes to running his country, Putin takes a grasping-at-straws approach.

Putin may think that bringing the longstanding Mideast conflict back into the headlines is going to improve his chances of conquering Ukraine and bringing the Soviet Union back from the dead.

He thinks taking a long shot is better than no shot at all. Who knows? He might get lucky.

Early on in his war on Ukraine, Putin seemed to think that Chinese dictator Xi Jinping was going to take pity on him and his country, and offer free money and/or weapons to shore up Russia’s Ukraine invasion. Instead, Xi insists on staying out of the war, while paying discount prices for Russian oil. He takes special care not to let his country get caught up in the economic sanctions that the U.S. and NATO countries and allies are directing against the Russians.

It’s not that Putin is stupid. If a war between Israel and Hamas turns out to be a big drain on the U.S. budget, the U.S. might have less money available to arm Ukraine.

Up till lately, however, Israel has had little to say about Russia’s treatment of Ukraine. Israel may soon take a more active role in helping Ukraine defend itself.

Any war is a terrible thing, and this one is no different. The stock market seems to be creeping upward. Maybe it knows something that Putin hasn’t figured out.

Meanwhile, if your stock portfolio makes sense to you, we advise against selling due to Mideast fears.

Stock market anxiety recedes with investment quality, diversification and portfolio balance

You’ll find that many of your worries concern things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would.

You get a much better return on time spent if you devote less of it to worrying about high-risk investments, and more of it to an investing strategy. Create a strategy that is built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.

There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run. Continue Reading…

Why you should focus on Lower-Risk Investments in your TFSA

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Here’s a Look at the Best Investments to Hold in a TFSA – and Why

Image via Deposit Photos

We recently had a question from a member of Pat McKeough’s Inner Circle that asked:

“Pat, I hold Intel in a non-registered account with a capital loss showing and am thinking of transferring it to my TFSA “in kind” with no tax penalty. Is Intel a suitable stock to hold in a TFSA?”

We’re not tax experts, so you might want to consider talking to an expert, especially if there are large funds involved.

However, transferring shares in kind into a TFSA does trigger a capital gain or loss for income tax purposes.

If the investment is in a capital gains position, you will have to declare it as a capital gain on your income tax return. But if there is a capital loss, you will not be able to declare the loss for tax purposes. This is because the government still sees you as the beneficial owner of the security.

Note that if you sell the shares in a non-registered account, you can deduct your loss against capital gains. For example, if he were to sell his Intel shares in 2023, he’d get to deduct the loss against his 2023 capital gains.

If you still have capital losses left over, you can carry them back up to three years (2022, 2021 and 2020), or forward indefinitely to offset future capital gains.

Hold Lower-Risk Investments in a TFSA

We think it is best to hold lower-risk investments (such as blue-chip stocks we see as buys like Intel) in your TFSA. That’s because you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains, as is the case with taxable (non-registered) accounts. You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls. Continue Reading…

3 Key Rules help make you a more successful Conservative Investor

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Conservative investors: Follow our three-part Successful Investor if you want to maximize your portfolio returns with the least amount of risk

Pixabay: Gerd Altmann

The surest way for conservative investors to make money in stocks is to start out by following our three Successful Investor rules for sound investing. They are the foundation of our Successful Investor system.

The first of these three Successful Investor rules is to invest mainly in well-established, profitable, dividend-paying companies. This rule goes first because it’s a simple and effective way of controlling the risk in your portfolio. Needless to say, that control is especially important when you have retired and you depend on your investments for income.

If a stock lacks one of these signs of investment quality, it may be riskier than you realize, yet still offer long-term potential. If it lacks two of the three, it exposes you to above-average risk and is suitable mainly for aggressive investors. If it lacks all three, it’s a high-risk speculation.

If you want to buy stocks missing all three of these qualifiers, it’s best to do so only with money you can afford to lose.

Avoid the urge to diversify into junior or riskier stock groups, just because they might offer the possibility of bigger gains. Stick with stocks that leave you feeling comfortable.

Diversification across sectors is also key for conservative investors

The second rule for conservative investors in our system is to spread your investments out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

When you follow this rule, you are taking note of the fact that a large random element is at work throughout the financial universe.

When you spread your holdings out like this, you diversify in a way that helps you avoid overloading yourself with stocks that are about to slump.

Unpredictable slumps may be due to weak industry conditions, changes in investor fashion, or other random factors. That’s a bigger risk if you concentrate your stock holdings in one or two of the five main sectors.

Simply staying aware of the concept of diversification can put you ahead of inexperienced investors who take a casual approach. But, beware of half-hearted diversification. It can hurt your investment results, rather than help.

For instance, beginners may zero in on investments that seem to have huge growth potential. Today’s examples might include concept stocks that focus on lithium mining, say, or AI (artificial intelligence), or cryptocurrency. If you disregard our first Successful Investor rule (see above), you’ll mainly wind up buying high-risk speculations that pay off sporadically at best. Continue Reading…

What are Canadian Depositary Receipts (CDRs) and should you invest in them?

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Are CDRs the better way to hold U.S. investments? What are the pros and cons?

TSInetwork.ca

Canadian Imperial Bank of Commerce (CIBC)’s Canadian Depositary Receipts (CDRs) give investors the opportunity to buy shares and/or fractions of shares in any of a number of U.S. or other foreign companies, in bundles that start out trading at a price of about $20 Cdn. each.

CDRs come with a built-in hedging feature that reduces exchange-rate fluctuations. This feature costs you 0.60% of your investment yearly.

CDRs let you invest small sums in U.S. or other foreign stocks, some of which have exceptionally high per-share prices. (For instance, Nvidia recently was trading for $475.06 a share.) Note, though, that with highly liquid stocks like Nvidia, or the other shares underlying CIBC’s CDRs, investors can easily buy, say, just one or two shares if they want.

CDRs represent shares of U.S. or other foreign companies but are traded on a Canadian stock exchange in Canadian dollars.

CIBC currently offers about 47 CDRs that trade on Cboe Canada (formerly NEO Exchange). Here’s just a few of them:

  • Alphabet Canadian Depositary Receipts – GOOG
  • Amazon.com Canadian Depositary Receipts – AMZN
  • Apple Canadian Depositary Receipts – AAPL
  • Meta Platforms Canadian Depositary Receipts – META
  • Microsoft Canadian Depositary Receipts – MSFT
  • Netflix Canadian Depositary Receipts – NFLX
  • Nvidia Canadian Depositary Receipts – NVDA
  • PayPal Canadian Depositary Receipts – PYPL
  • Starbucks Canadian Depositary Receipts – SBUX
  • Tesla Canadian Depositary Receipts – TSLA
  • Visa Canadian Depositary Receipts – VISA
  • Walt Disney Canadian Depositary Receipts – DIS

Cboe Canada is recognized by the Ontario Securities Commission.

An individual CDR is not intended to equal the cost of a single share. Instead, each new CDR started out trading at around $20 Cdn., representing ownership of one or more shares and/or a fraction of one share of the underlying stock, depending on the stock’s price. As mentioned, shares of many of the largest companies in the world trade at significantly higher prices, although some trade much lower as well.

Dividends paid on the shares underlying CDRs will be passed through to CDR investors in Canadian dollars when received, based on the current foreign exchange rates.

The main negative about CDRs is the Fees

CIBC charges no direct management fees for CDRs. However, the CDRs are hedged against movements of the U.S. dollar relative to the Canadian dollar. That means the Canadian-dollar value of the CDRs rises and falls solely with the movements of the underlying stock.

Of course, hedging has costs: and hedging against changes in the U.S. dollar only works in your favour when the value of the U.S. dollar drops in relation to the Canadian currency. If the U.S. dollar rises while your investment is hedged, that reduces any gain you’d otherwise enjoy, or expands any loss. Continue Reading…