It Pays to Invest Like a Dog

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The Dogs of the Dow strategy is a low-maintenance approach for investors who value a company based on the dividend it pays. It's a stock-picking method in which your returns are fixed to the 10 highest-yielding stocks in the Dow Jones Industrial Average. Let's see how 2011's Dogs (picked at the end of 2010) have performed thus far, and which stocks look most promising.

Top dogs
This year's Dogs of the Dow are listed in descending order by 2010 year-end yields.

Companies

2010 Year-End Yields

Current Yield

AT&T5.85%5.87%
Verizon5.46%5.41%
Pfizer (NYS: PFE) 4.57%4.15%
Merck (NYS: MRK) 4.22%4.41%
Kraft Foods3.68%3.30%
Johnson & Johnson (NYS: JNJ) 3.49%3.54%
Intel (NAS: INTC) 3.42%3.42%
DuPont (NYS: DD) 3.29%3.41%
McDonald's (NYS: MCD) 3.18%3.03%
Chevron (NYS: CVX) 3.16%3.16%

Source: Yahoo! Finance.

This year, investors have endured increasing levels of uncertainty in the stock market. The year-to-date return of the Dow Jones Industrials is about 3.5%, or roughly 5.5% if you add in the dividends. Through the first three quarters of 2011, the straight return for the Dogs is more than 7% -- factor in dividend reinvestments and the return climbs to 11%.

These returns put the Dogs of the Dow on track to beat the broader index this year. That sounds great, until you consider the strategy's historical data. The Dogs of the Dow have underperformed the Dow Jones Industrial Index in 10 of the past 15 years.

Given the mixed performance of this strategy in the past, I recommend using the Dogs of the Dow as more of a starting point for your research, versus a rapid-fire approach to stock picking. A deeper look at our top dogs will give us a clearer picture of which stocks are leading the pack.

In dog we trust
DuPont and Merck get factored out right off the bat for being the only two stocks of the top 10 that posted share-price declines for the period. On the flip side, stocks bringing in the highest returns included McDonald's at almost 25%, Chevron at 19%, and Intel at 17%.

Of this year's biggest winners, pharmaceutical company Pfizer features the highest dividend yield. However, the company will lose its patent protection for Pfizer's cholesterol-fighting drug, Lipitor, later this year -- costing the drug maker future sales.

Chevron Corporation Dividend Yield Chart

Chevron Corporation Dividend Yield Chart by YCharts

With Pfizer on watch for the impending patent loss, Chevron emerges as our clear winner. The energy stock has a solid dividend yield, and dividend investors will also like Chevron's strong history of paying out dividends, in fact, the company has increased its dividend for the past 24 years straight.

Bone up
The Dogs of the Dow is a simple strategy that makes for a good starting point for investors. A closer look at the top 10 stocks will help investors look beyond a stock's yield to the company behind that stock. Learn when these stocks are trading at an attractive valuation by adding them to The Motley Fool's free tracking tool: My Watchlist.

At the time this article was published Fool contributor Tamara Rutter owns no shares of any of the companies mentioned. Follow her on Twitter, where she goes by@TamaraRutter. The Motley Fool owns shares of Intel and Johnson & Johnson and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Johnson & Johnson, McDonald's, Pfizer, and Chevron, as well as creating a bull call spread position in Intel and a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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