Dogs of the Dow Are 2022's Best in Show

Some of the best investments for income investors in a volatile 2022 have come from the Dogs of the Dow.

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All portfolio doctors should prescribe high dividends to remedy rising interest rates and stiff inflation.

In 2022, the first year in recent memory pockmarked by those twin afflictions, dividend-heavy stocks such as utilities, pharmaceuticals, pipelines and many consumer-oriented blue chips like those found in the Dogs of the Dow have held up fine. There is a massive disparity of results within this year's stock, mutual fund and exchange-traded fund (ETF) listings.

The FAANGs – or whatever we call them now after the renaming of Facebook and Google – are a ball and chain. Your basic core S&P 500 Index fund? Down double digits. I have never liked indexing anyway. That aversion goes doubly for bonds, real estate investment trusts (REITs) and master limited partnerships (MLPs). But I digress.

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A Passion for Dividend Stocks

As we hit 2022's midpoint, the most upbeat performance stories underscore my perpetual passion for dividends.

The Dogs of the Dow – the 10 members of the Dow Jones Industrial Average that begin the year with the highest dividend yields – are clearly this year's best in show. Through June 3, seven Dogs have positive returns, and only one, Chevron (CVX (opens in new tab)), is an oil company. Dow (DOW (opens in new tab)), the chemical giant, is up 20.7%. The Dogs sport dividend yields ranging from 2.8% – Coca-Cola (KO (opens in new tab)) – to 4.7% with International Business Machines (IBM (opens in new tab)). I think IBM's 4.7% yield is a leading reason it is up 8% while a typical tech fund has coughed up a quarter of its value.

A pair of ETFs – ALPS Sector Dividend Dogs (SDOG (opens in new tab), $55) and ALPS International Sector Dividend Dogs (IDOG (opens in new tab), $28) – are also scaring off the bears, with year-to-date returns of 4.4% and 2.6% respectively. These funds are not replicas of the Dogs of the Dow but use a similar methodology across numerous sectors; SDOG's past four quarterly distributions combined work out to a 3.6% yield, and better yet, the payments have been growing with each distribution. (Securities I recommend are in bold. Prices and other data are as of June 3.)

To further this furry-friend theme, Caterpillar (CAT (opens in new tab)) – in the Dow index, but not a 2022 Dog – is up 8.9% this year, one of the best in its sector. CAT is swimming in cash, and in May promised dividend increases in "the high single digits" shortly and for each of the next three years, although its 2% yield already exceeds the S&P 500's 1.6%.

Caterpillar could write still bigger checks if it opts to emphasize cash payouts over stock buybacks, a practice investment managers sometimes clearly prefer. "You can’t fudge dividends," says Henry "Hank" Smith, a dividend fan who is head of investment strategy for Haverford Trust Company. Smith says paying hard cash "is the most tangible statement management can make about future prospects."

Another of my most esteemed dividend investments, Legg Mason Low Volatility High Dividend ETF (LVHD (opens in new tab), $39). It's off 1.3% so far this year, but that is excellent compared with the broad market. The ETF's 3% yield is reliable. Two thumbs up.

Dividends catch regular criticism as a lazy use of capital or a drag on future growth. Those, however, are untimely complaints when you need high current income and shelter from what might still end up as a losing year for the S&P 500 and certainly for the Nasdaq.

Jeffrey R. Kosnett
Senior Editor, Kiplinger's Personal Finance
Kosnett is the editor of Kiplinger's Investing for Income and writes the "Cash in Hand" column for Kiplinger's Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.