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A Brief Review

The Dogs Of The Dow is a simple stock trading strategy that only requires a few minutes of research every 12 months. At the beginning of every year (or any selected 12-month period), an investor takes a look at the Dow 30 Industrials and selects the 10 stocks with the highest yields, buying an equal dollar amount of each issue. At the end of 12 months these are sold and another set of stocks are chosen, based on the new list of highest yielding Dow components. 

The system basically combines elements of conservative, value/contrarian, and dividend investing. Over time, it has performed fairly well, especially when considering the amount of effort required.  For more details about how, why, and when the strategy works, see Dogs of the Dow, A conservative, Low Maintenance Strategy That Occasionally Has Its Day.

2011’s Dogs

At the end of 2010, these were the Dow components with the highest yields (in descending order): AT&T (T - Free AT&T Stock Report), Verizon (VZ - Free Verizon Stock Report), Pfizer (PFE - Free Pfizer Stock Report), Merck (MRK - Free Merck Stock Report), Kraft Foods (KFT - Free Kraft Stock Report), Johnson & Johnson (JNJ - Free Johnson & Johnson Stock Report), Intel (INTC - Free Intel Stock Report), DuPont (DD - Free DuPont Stock Report), McDonald’s (MCD - Free McDonald's Stock Report), and Chevron (CVX - Free Chevron Stock Report). The yields ranged from a high of 5.85% for AT&T, to a low of 3.16% for Chevron.

A Tough Year So Far. . .

This hasn’t exactly been the greatest year to be in the stock market, what with high unemployment, a weak housing market, budget concerns in the United States, sovereign-debt issues overseas, and reams of other negative news. Accordingly, investors have had a lot to worry about.

Even for those who stick to the blue chips, meaning the 30 stocks that make up the Dow Industrial Average, there seemed to be few places to hide. An equally-weighted investment in all Dow 30 issues would have generated a loss of 9.8% through the first three quarters of 2011. Although dividends helped a bit, they only would have eased the deficit to 7.9%.  For the most part, the damage was widespread, with 20 of the Dow components posting share-price declines for the period; 13 of which went into double-digit territory. Topping the list were massive hits taken by Bank of America (BAC - Free Bank of America Stock Report), down 54.1%, Hewlett Packard (HPQ - Free Hewlett-Packard Stock Report, -46.7%), and Alcoa (AA - Free Alcoa Stock Report, -37.8%).

. . . But The Dogs Continue To Shine

In contrast, the so-called “Dogs” fared decidedly better. An equally-weighted investment in the group would have broken even for the year-to-date through September, shedding a mere 0.1%. But, as those of you who have been following along will recall, these issues started the year with the highest yields out of the Dow 30. Adding the dividends back in, this mangy pack would have returned a very respectable 3.1%.

To be sure, they weren’t all winners. But it’s worth nothing that only three of the 10 posted a decline in share price for the period, versus 20 losers for the full Dow 30. The only ones that really dragged down the Dogs were DuPont, with a loss of 19.9%, and Merck which fell 9.3%. AT&T was also off, but its 2.9% drop was more than made up for by its dividend.

A Peek Ahead

To recap the scorecard for the year so far, the dogs remain out in front, coming in flat through the first three quarters in terms of price performance (-0.1%), but with a gain of 3.1% when factoring in dividends. Meanwhile, the Dow 30 stocks as a whole were off 9.8%, and down 7.9% with dividends.

As we’ve noted before, the system doesn’t always come out ahead. Most recently, from 2007 through 2009, the Dogs underperformed the Dow 30. However, they came out in front last year and, so far, seem well on their way to a good showing for 2011 as well.

For those looking ahead and trying to handicap likely candidates for the next year’s Dogs, It’s interesting to note that the stock’s posting the largest share-price declines so far this year were concentrated among the lowest yielding issues at the start of 2011. Thus, even with the aforementioned large percentage declines (and barring any further setbacks), most of this year’s biggest losers appear to have little chance of making the 2012 Dog team. However, General Electric (GE - Free General Electric Stock Report) stock, whose yield fell just short of last year’s top ten, was down 16.8% through September. This works out to a yield of 3.7%, giving it a tie for sixth place among the current leaders.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.