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Tickers in this Article: BAC, GM, C, MRK, VZ, T, HD, GE, JPM, PFE
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, and 2008 is not shaping up to be a Dog year either. 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
Company
Price*
Yield
Bank of America (NYSE:BAC)
$18.52
12.7%
General Motors (NYSE:GM)
$9.84
10.7%
Citigroup (NYSE:C)
$14.56
8.4%
Pfizer (NYSE:PFE)
$17.58
7.3%
Verizon (NYSE:VZ)
$35.04
4.9%
AT&T (NYSE:T)
$31.95
4.9%
JPMorgan Chase (NYSE:JPM)
$31.02
4.8%
General Electric (NYSE:GE)
$26.65
4.6%
Home Depot (NYSE:HD)
$21.46
4.2%
Merck (NYSE:MRK)
$36.58
4.1%
*Data as of market close July 15, 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.

Picking The Best of Breed
I'm not crazy about the financial sector in general right now given the near-term uncertainty for the domestic economy. However, Bank of America (NYSE:BAC) is not some fly-by-night organization. Its vast footprint is one of its advantages, and should make it less susceptible to economic fluctuations than some of the smaller banks. Bank of America has more than 6,100 retail banking offices and in 175 countries. It also has its hands in a variety of products ranging from traditional bank accounts to mortgages to credit cards.

There are other alluring factors. For example, it currently trades under its book value (of $31.21) according to Yahoo Finance. It also sports a dividend with a current yield of 12.7%.

There has also been a recent insider purchase, which gives me some confidence. On June 10, Jackie Ward, one of the bank's directors, bought 6,700 shares at $29.72 per share. (To learn how keeping tabs on company executives can provide clues about where a stock is headed, see Delving Into Insider Investments.)

Finally, the company is expected to earn $2.31 a share this year and $3.44 a share next year. Investors should take those estimates with a grain of salt because of current economic conditions, but they are still eye catching nonetheless given that the shares trade around the $20 level. The bottom line -- while the near term remains uncertain, I like Bank of America for the long haul.

Conclusion
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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