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A Quick Review

Trading the Dogs of the Dow system is fairly simple and straight forward. At the start of the year, you take a look of the list of Dow 30 Industrial companies (DJIA), choose the 10 carrying the highest dividend yields and then divide your money equally among those 10. A year later, the process gets repeated, spreading your funds among the new list of top-10 candidates.

The basic premise is that these are all high quality companies, and, for whatever reason, a few have temporarily fallen out of favor, and thus now have relatively high yields. Being high-quality blue chip stocks, the theory goes, they will likely bounce back. (For a more detailed background on this system, see Dogs of the Dow, A conservative, Low Maintenance Strategy That Occasionally Has Its Day.)

A Solid Year

Last year’s Dogs consisted of  the following blue chips: 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). Their yields ranged from a high of 5.85% for AT&T, down to 3.16% for Chevron.

The Dogs strategy worked out quite nicely, as the stocks with the highest dividend yields at the start of the year turned in some of the best returns of all the Dow issues in 2011. An equally weighted investment in the group generated 12.2% in price appreciation in 2011. By comparison, the Dow Jones Industrial Average was up about 5.5%. Meanwhile, six of the 10 Dogs had double digit price increases, led by, McDonalds (up 30.7%), Pfizer (23.6%), and Kraft (18.6%).  This marked the second year in a row that the Dogs performed better than the unmanaged index.

By contrast, the “non-dogs” (that is, the 20 Dow stocks that had the lowest yields at the start of 2011), did rather poorly. As a group, this sorry bunch was down 4.4% for the year.  To be sure, even these puppies had some solid winners among them, such as IBM (IBM - Free IBM Stock Report, up 25.3%) and Home Depot (HD - Free Home Depot Stock Report, up 19.9%). But these were more than overwhelmed by some real mutts. Bringing up the rear were dreadful returns from Bank of America (BAC - Free Bank of America Stock Report, which lost 58.3%), Alcoa (AA - Free Alcoa Stock Report, down 43.8%), Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report, down 38.8%), and JP Morgan (JPM - Free JP Morgan Stock Report, which shed 21.6% of its market value).

This Year’s Bunch Shows Few Changes

One of the beauties of the Dogs of the Dow system is that it requires comparatively little work. At most, you would have 10 stocks to replace once a year. But that’s seldom the case. In fact, the list of highest yielding Dow stocks at the end of 2011 was hardly changed from 2010.

Now, that may come as a surprise to some. After all, weren’t some of those aforementioned other stocks beaten low enough to improve their yield standing? Well, yes, but not always enough to make them contenders. As it turned out the worst performers last year were largely concentrated at the bottom of the dividend totem pole. So, even Bank of America, with its near 60% plunge in price, only saw its dividend yield improve slightly, from 0.3% to, 0.7%.  JP Morgan, however, saw its yield bump up to 3.01%, and Microsoft, after a modestly down year, was bubbling just under the top 10 chart, with a yield of 3.08%.

Still, the only stocks that were knocked off the old list were McDonald’s and Chevron.  They actually had solid years, rising 30.7% and 16.6% for 2011, respectively. But the price increases resulted in lowering their yields just enough to not make the cut.

These were replaced by General Electric (GE - Free General Electric Stock Report) and Procter & Gamble (PG - Free Procter & Gamble Stock Report), which, in contrast, didn’t do quite as well last year. GE’s price slid by 2.1% in 2011, while P&G notched ahead by 3.7%.

The yields for the Dogs of 2012 ranged from 5.82% for AT&T, to 3.10% for Kraft Foods.

Eight Weeks Later…And the Last Shall Be First

Nearly two months into the new year, and the Dogs performance isn’t at all too shabby. As a group, they’re up a respectable 2.4% or so, which would put them on pace to exceed last year’s performance.  However, the real story is the impressive rebound in those stocks that did not make the cut for 2012. An equal weighted investment in the 20 lowest yielding Industrials would be up a hefty 10.6% for the young year to date. Indeed, half of these issues have registered double digit increases over this brief period, with Bank of America leading the pack with an astounding 41.7% gain.

Of course, eight weeks do not a year make, and the story could be completely different when we close the books on 2012. Historically, however, the Dogs of the Dow strategy tends to perform better during flat-to-down market periods. So, if we have a boom year, their performance will likely lag. We’ll check in a little later and see. But, for now, the Dogs are not winning Best In Show.


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