DJD: How About Them Dogs (Of The Dow) Giving SCHD A Run For Its Money (NYSEARCA:DJD)

Around the start of each year, investors are obsessed with annual predictions, and also with identifying the so-called “Dogs of the Dow.” The 10 highest yielding stocks of the 30 in the Dow Jones Industrial Average have a solid history of delivering total return. And the Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD) is one of my favorites, as it weights the Dow stocks by dividend yield. So it is like getting the Dogs of the Dow, plus a litter of additional high-quality stocks to boot.

Then, the attention falls off until the following December. But not for me, I follow the Dow stocks closely, particular those dividend dogs. And that’s why I track DJD and other Dow-driven ETFs.

DJD is not a very popular dividend ETF. At just under $300 million in assets, it pales in comparison to dividend ETFs like the $55 billion Schwab Dividend Equity ETF (SCHD) and the $65 billion Vanguard High Dividend Yield ETF (VYM). Those two funds rake in the dollars. But this old dog (me) still prefers the simplicity of the Dow, and the tilt toward those mutts that currently carry high yields relative to the rest of the pound.

I wrote about the Dogs of the Dog and DJD about three months ago, so this is a good time to check in and see if it makes sense to issue a table “pound” on the buy side, or sell like the mailman is coming. OK, that’s it for the canine analogies. On to the analysis.

DJD: an updated look

When the Dow started way back in 1896, I suspect investors could have never imagined that one day a company like Amazon (AMZN) would be part of the venerable index. A company that delivers whatever we want, sometimes the same day? Horses didn’t even do that!

But Amazon became the latest non-yielding stock to enter the Dow, doing so last month as Dow dog Walgreens (WBA) was curbed (OK, I lied, I had one more dog analogy in me). Ironically, it was Walmart’s (WMT) decision to split its stock 3-for-1 that allowed AMZN to enter the Dow, since that index’s quirky price-weighting system left it short of some retail exposure.

That leaves DJD looking like this from a sectors standpoint, and at the top end of the holdings list. Note how concentrated it is at more than 60% in the top 10 stocks, in part because some Dow stocks do not pay dividends, and others pay very little. That’s a bit of a break with the Dow’s long history, but reflects the fact that investors (outside of this and similar communities) do not prioritize dividend stocks the way I/we do, in an era of memes and artificial intelligence.

Other than some jockeying for position among the top 10, WBA’s exit made room in the current Dogs for Goldman Sachs (GS), who avoided being one of the biggest dogs in Wall Street history when it helped save the global financial system in 2008. But Goldman’s paltry forward yield of just 2.7% signifies just how difficult it is to find that ideal combination of quality and high dividend yield. That is what I look for in selecting stocks for my Yield at a Reasonable Price (YARP) stock portfolio.

I like to lean as heavily as possible on the Dow Industrials and Transport averages, but it isn’t as easy as it used to be. Companies are more prone to buy back stock these days. And in the case of a couple of Dow components, Boeing (BA) and Disney (DIS), they cut their dividend payments to zero during the pandemic, only to see the latter stock reinstate a light-yielding payout very recently.

DJD is lagging a bit this year, as it often does during markets that favor glamour stocks over traditional blue chips. A few DJD components have had weak periods, especially BA, with its much-publicized mechanical issues. Yet despite that, DJD is now slightly ahead of SCHD the past three years, and for the first time in a while is neck-and-neck with the much bigger market darling.

It would not surprise me at all to see DJD continue gaining on SCHD, for two reasons, each of which is a direct result of my watching markets and investor behavior closely since the 1990s:

1. Markets move in cycles, and they tend to swing back to traditional blue chip value stocks.

2. The market likes to deliver the most pain to the most people. And at the size of ETFs like SCHD and VYM, there is an element of hype and overconfidence in the shareholder bases of those funds that allowed them to reach those asset levels. As I’ve said before, those ETFs are OK, they are competitive for sure. But I’ve had enough conversations with people invested in SCHD in particular to convince me that there is a belief in that ETF that goes beyond fundamentals, driven more by past performance and assuming it will repeat. Cue the “hate mail.”

But I just think markets have a reversion to the mean when it comes to things like this, and I see too many Dow stocks starting to look like eventual long-term buys. Should SCHD be bigger than DJD? Sure, it has more marketing muscle behind it, and a better track record over a limited time period. But to be more than 160 times larger? I smell a classic past performance trap. That said, this is relatively splitting hairs versus some of the head to head comparisons I could make at the stock level, and aim to do in upcoming single-stock-focused articles.

What up, dogs?

Here’s a snapshot look at the top 10 DJD holdings, the current Dogs of the Dow, and some quick observations about what I see in those Seeking Alpha quant grades:

First, I see straight A’s across the Profitability line for these top 7 holdings. WBA had a C rating and AMZN replaced it with an A+, so a nice upgrade there. In fact, GS is the only one of the current 30 that is not rated A- or better for profitability. More importantly to me, it was downgraded by the Seeking Alpha quant grading system back on 11/6/23. But wow was that a downgrade: from A+ to F! Goldman, the “Teflon Don” of Wall Street for a long time now, is up 27% since that downgrade. And, while this article is not focused on GS as one of 30 ETF holdings for DJD, I thought it helpful to point out, as it certainly jumped off the page for me.

Finally, I’ll classify this last picture as “odd but interesting to me.” It is the DJD, the ETF that tilts toward the Dow Dogs, versus the SPDR Portfolio S&P 500 High Dividend ETF (SPYD), which owns the 80 largest yielders in the S&P 500. So they are closer peers than the ETFs I mentioned above, and they have a cyclical performance relationship with each other. I’m just showing the past year of 1-year rolling returns between the two, in the lower part of the chart. See how DJD’s brief advantage just nose-dived recently? It is now down to the point where it often bottoms. Translation: there are some Dow stocks with high yields which are getting more likely to distinguish themselves over the broader array of S&P 500 high yielders.

This all adds up to a lot of trend-based analysis that may or may not bear fruit in the near future. But by doing this quarterly assessment of what’s going on with that narrower group of Dow stocks, particularly the higher yielders in the group, I can get an idea of what might stand out as I do what I am about to do: continue building my YARP portfolio of individual stocks. I have some Dow 30 components in mind and also some off-the-radar types, and I aim to post them in as rapid-fire a fashion as possible into April. I wouldn’t go so far as to declare April “YARP appreciation month,” but I have to admit, I like the sound of it. Sort of catchy. Dow Dog catcher kind of catchy.

DJD: still one of my best friends

In the meantime, I continue to like DJD and give it a buy, though I don’t own it outright. I do own some of the components, and likely will be adding some or at least watch-listing several soon. As I’ve often written, I continue to believe that the Dow is a great investor “playground” to find consistently profitable businesses that have been through more ups and downs in the US and global economy than most investors have. I still think that counts for something, despite what dividend ETF flavor of the year or even decade comes along.