A simple investment strategy that works well over the long term is to buy the five stocks listed in the Dow Jones Industrial Average with the highest dividend yields. Readjust the portfolio annually to hold the newest highest-yielders. The strategy doesn’t work well every year, but it’s doing very well in 2016.
To be sure, the Dow dogs have collectively been big beneficiaries of this year’s drop in bond yields, which has made buying high-dividend stocks an increasingly attractive options for income seekers.
“If you look back at this year, the strategy probably performed well because a lot of the bond-related investments performed well as rates were falling through the first half of the year,” Oppenheimer chief technical analyst Ari Wald said Monday on CNBC’s “Trading Nation.”
Yet looking forward, with yields heading higher due to inflationary pressures and the prospect of at least one Federal Reserve rate hike in the next few months, “we don’t see this as an attractive strategy because stocks that pay high dividends tend to come under pressure in a rising interest rate environment,” Wald warned.