Dow Dogs and Englishmen

As 2020 draws to a close, it may go down on record as the year of the forgotten income investor. Bond yields are near record lows. Dividend payments have been reduced or suspended by many companies impacted by the coronavirus pandemic.

Even utility stocks have recently fallen out of favor. In October, utilities were the top-performing sector in the entire S&P 500 Index. But since last month they have gradually lost value.

What is an income investor to do? I suggest looking overseas for yield in 2021. For example, the ALPS International Sector Dividend Dogs ETF (IDOG) pays a dividend yield of 5.5%. That is considerably higher than the 3.5% dividend yield of the Invesco Dow Jones Industrial Average Dividend ETF (DJD).

Both funds are modified versions of the “Dogs of the Dow” portfolio strategy. The concept is to own the highest-yielding stocks of the Dow Jones Industrial Average. Since they also tend to be the most oversold, they are likely to outperform the index when they recover.

Until this year, that strategy had performed pretty well. From 2016 through 2019, DJD gained 70% while the Down Industrial Average (DJIA) was up 63.3%. Over the same span, IDOG performed considerably worse (more about that later).

However, this year is a different story. Through the end of last week, DJD is down slightly in 2020 compared to a 5.7% gain in the Dow. A quick look at DJD’s holdings tells the story. At the start of this year, the two highest yielding stocks in the Dow were Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).

The energy sector got crushed in 2020. The coronavirus pandemic suppressed demand for energy, driving down oil prices. It’s no wonder DJD underperformed the index.

The Big Dog Is Gone

Unfortunately, 2021 may not be much better for the Dogs of the Dow. That’s because the index replaced three of its holdings a few months ago. Gone is its biggest dividend payer, ExxonMobil, along with Pfizer (NYSE: PFE) and Raytheon (NYSE: RTX). In their places are (NYSE: CRM), Amgen (NSDQ: AMGN), and Honeywell International (NYSE: HON).

Those moves may help the Dow keep up with the more popular S&P 500 and the NASDAQ Composite indices. Momentum growth stocks are what drive the market these days, not steady dividend payers.

The highest-yielding Dow stocks heading into next year probably won’t get much love from Wall Street in 2021. Until COVID-19 has been fully contained, the emphasis will be on future earnings growth, not current income.

This brings us back to IDOG, which is the overseas version of Dogs of the Dow. It holds the five highest-yielding stocks from each of the 10 major economic sectors to ensure diversification.

The fund only buys stocks in developed economies, excluding the United States and Canada. Its biggest holdings in terms of countries are in the United Kingdom, Japan, Australia, and Spain. There is no direct exposure to mainland China (but Hong Kong is included).

That’s important because the stock markets in most of those countries have not performed nearly as well as in the U.S. IDOG returned 38.4% over the four-year span ending in 2019, slightly better than half the return for DJD.

This year, both funds have broken even through the end of last week. With new cases of COVID-19 spiking in the U.S. and Great Britain, they could each be under selling pressure during the first half of 2021.

International Exposure

But there the similarity between both funds ends. IDOG’s international exposure puts it in an advantageous position with respect to the coronavirus pandemic:

  • The entire population of the U.K. could be vaccinated within the next few months.
  • Japan’s daily case count is less than 2% of that of the U.S.
  • Australia appears to have already defeated the virus.
  • Spain’s daily case count has dropped in half over the past two months.

As those economies are able to fully reopen, their stock markets could rally strongly. That should help IDOG, which dropped last week after a more infectious strain of COVID-19 was discovered in the U.K.

Fortunately, the new strain is not believed to be more lethal. Also, the current vaccine should be just as effective against the new strain. If true, the current scare should abate once the U.K. has vaccinated its population.

In that case, the current drop in IDOG’s share price should be a buying opportunity for income investors. But if that’s too speculative for you, there are more reliable ways to make money in the stock market.

For reliable, outsized profits, consider investing in the global roll-out of 5G (fifth generation) wireless technology.

The world is becoming increasingly connected. The Internet of Things is really only getting started. 5G promises to make the world a truly inter-connected one, where potentially billions of devices and systems can seamlessly communicate with one another.

4G made life a whole lot more convenient and made many companies that were able to seize the opportunity incredibly rich. 5G is an even bigger leap, and the opportunities are even greater.

We’ve found a technology company that’s an indispensable part of the 5G ecosystem. This investment play is little noticed by Wall Street. The time to buy shares is now, before the investment herd catches on. For details click here.