Will the Dogs of the Dow Beat the Market?

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Following the "Dogs of the Dow" strategy is one of the simplest dividend methods for beating the market. Over the coming year, I'll track the Dogs' performance and keep you abreast of news affecting these companies.

The strategy
"Dogs of the Dow" refers to an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average (INDEX: ^DJI) . The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would get large not only dividends but also gains in the stocks underlying those dividends.

High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:

  • Many people fear that increasing dividend yields mean lower portfolio returns.
  • Others believe that dividend payments mean management believes the business is done growing.

Evidence compiled by Tweedy Browne refutes these beliefs. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.

Performance
The Dogs of the Dow returned 12.3% in 2011, which beat the Dow's return of 5.5%.

Check out the 2012 Dogs of the Dow performance so far:

Company

Initial Yield

Initial Price

YTD Performance

AT&T5.82%$30.24(2.15%)
Verizon Communications4.99%$40.12(6.04%)
Merck (NYS: MRK) 4.46%$37.702.18%
Pfizer (NYS: PFE) 3.8%$21.64(0.74%)
General3.7%$17.916.25%
DuPont (NYS: DD) 3.58%$45.7810.79%
Johnson & Johnson3.48%$65.58(0.03%)
Intel3.46%$24.2510.23%
Procter & Gamble (NYS: PG) 3.15%$66.71(2.84%)
Kraft Foods3.10%$37.362.97%
Dow Jones Industrial Average  3.63%
Dogs of the Dow  2.06%
Dogs Return vs. Dow (percentage points)  (1.56%)

Source: S&P Capital IQ as of Jan 27.

Since my last report, the Dow Jones Industrial Average fell 0.47%. The Dogs of the Dow fell more than the Dow, moving from outperforming the market by 1.6 percentage points to a 1.56-point disadvantage.

Movers and shakers
The biggest movers this week were Verizon and AT&T, which fell 4.51% and 4.41%, respectively. Both stocks reported disappointingearnings this week.

Earnings and news
Besides Verizon and AT&T, three other Dogs reported earnings this week.

Upcoming

  • Pfizer reports earnings on Tuesday. Analysts expect earnings per share of $0.47 and revenue of $16.61 billion.
  • Merck reports earnings on Thursday. Analysts expect earnings per share of $0.95 and revenue of $12.53 billion.

More dividends
Consider these 10 tickers along with the 11 names from a new free report from The Motley Fool's expert analysts called "11 Rock-Solid Dividend Stocks." Get instant access to the names of these 11 dividend stocks for free.

At the time this article was published Dan Dzombakholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Intel and Johnson & Johnson and has bought calls on Intel.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble, Pfizer, Intel, and Johnson & Johnson, creating a diagonal call position in Johnson & Johnson, and creating a bull call spread position in Intel. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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