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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, however in 2007 the strategy faltered. But, 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 Dog House
Share Price
Dividend Yield
Bank of America (NYSE:BAC)
Citigroup (NYSE:C)
Pfizer (NYSE:PFE)
Verizon (NYSE:VZ)
Merck (NYSE:MRK)
General Electric (NYSE:GE)
JPMorgan Chase (NYSE:JPM)
Dupont (NYSE:DD)
Data as of market close August 22, 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 might be to pick some of the better stocks of the bunch and consider adding those to a portfolio.

JPMorgan Chase
Thanks to the slowing economy, the weak equities markets, the lack of demand for new IPOs and the credit crunch, the financial sector in general hasn't been doing very well as of late. New York based JPMorgan is no exception. JPMorgan's stock is currently more than 26% off its 52-week high and the news flow from the company hasn't been encouraging.

Earlier this month the Associated Press reported JPMorgan had lost about $1.5 billion in its mortgage-backed securities and loans to date in the July-to-September quarter after hedges. Despite, the plethora of bad news, I don't think we can count JPMorgan out just yet. The company has a huge global presence. It operates in more than 60 countries and still has a good reputation here in the United States. One could also argue that down the line it has the potential to squeeze some value from its high profile pick up of Bear Stearns. (For more, read Dissecting The Bear Stearns Hedge Fund Collapse.)

JPMorgan is expected to have earnings per share of $2.33 this year and $3.34 a share in fiscal 2009. according to Yahoo Finance. That means that the company currently trades at 15.6-times the current year estimate and at under 11-times the 2009 estimate. These are decent multiples. As a bonus, the shares pay a dividend. The current yield is 4%.

The Downside
While JP Morgan looks like it will be able to weather the storm, there are no guarantees. If another macroeconomic shoe were to drop JPMorgan's stock could be pulled down with the group.

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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