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Tickers in this Article: BAC, C, PFE, T, VZ, MRK, GE, JPM, DD, AIG
The Dogs of the Dow is an investment strategy popularized in the early 1990s by Michael O'Higgins in his book "Beating The Dow" (1992). The original strategy involves picking the ten highest dividend yielding Dow stocks at the beginning of the year in equal proportions and recalibrating the portfolio each year. The strategy is grounded in the theory that the Dow component stocks are blue chips that don't alter their dividend payouts to reflect market conditions. Due to this stable policy, the dividends are reflective of the true value of the companies. The Dogs offer higher yields because the market has soured on them, so buying in when the yields are high, and waiting for the market to reflect the true value of the shares can pay off.

In his book, O'Higgins showed that the Dog strategy returned 17.9% annually compared with 11.1% for the Dow over a 17-year period from 1973 to 1989. That is a great return, but in 2007 the strategy faltered. The silver lining is that the strategy can at least point us in the direction of some of the highest yielding blue chips while we sift out the undesirables. (For more on dividends, read our educational articles The Power Of Dividend Growth, and The Importance Of Dividends.)


The Doghouse

Company
Share Price
Dividend Yield
Bank of America (NYSE:BAC)
.30
8.30%
Citigroup (NYSE:C)
.62
6.90%
Pfizer (NYSE:PFE)
.64
6.40%
AT&T (NYSE:T)
.40
5.10%
Verizon (NYSE:VZ)
.74
4.90%
Merck (NYSE:MRK)
.71
4.20%
General Electric (NYSE:GE)
.35
4.20%
JPMorgan Chase (NYSE:JPM)
.74
4.00%
AIG (NYSE:AIG)
.60
3.80%
Dupont (NYSE:DD)
.74
3.60%
Data as of market close August 18, 2008
As alluded to above, the traditional Dog strategy would not be recommended here. Some of these stocks have positive prospects, some have negative, and some have been Dogs for a long time. A better strategy is to pick some of the better stocks of the bunch and consider adding those to a portfolio.

Citigroup in the Doghouse
Citigroup has been going through a bit of a rough patch to say the least. The well known investment bank has booked billions in charges due to the subprime crisis. Last year Citigroup saw its high flying CEO Charles Prince leave the firm, and then the company cut its dividend - a bold move. Perhaps not surprisingly, as you can tell from its one year chart, the stock has not fared well.

I don't think we should count out Citigroup just yet. The company remains a major player on Wall Street, it has a new chief executive in Vikram Pandit at the helm, and it seems to be surviving, unlike Bear Stearns. Of course, this doesn't mean that Citi is going to be turning in blockbuster numbers this year. It's expected to lose $1.15 per share this year, according to consensus estimates. The good news is that in 2009 the Street is expecting Citi to earn $2.31 per share. If the company can meet that 2008 and 2009 estimate, and prove that the worst is over, the stock could pop.

Additional Concerns
The danger is trying to call a bottom. Many have tried, but so far they've all been wrong. A prolonged economic slowdown could stymie a comeback. In addition, the prospect for tax loss selling and its effect shouldn't be overlooked either.

The Dogs of the Dow strategy bases itself on investment in the highest yielding 10 stocks of the Dow Jones Industrial Average. These stocks get to be the highest yielding through a combination of their stable dividend policies and falling out of favor with the market. As the market moves back toward reflecting the full value of the dogs, the strategy can boast sizable gains. However, some of these stocks are dogs for a reason, and no investment strategy should be an excuse to invest in bad stocks. The dogs point us in the direction of high yielding blue chip stocks; from there we should look for the quality picks.

To learn more on this strategy, check out our related article Barking Up The Dogs Of The Dow Tree.

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