Filed Under:
Tickers in this Article: BAC, GE, C, PFE, T, VZ, AIG, MRK, JPM, DD
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 strategy can, however, 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
Share Price
Dividend Yield
Bank of America (NYSE:BAC)
$31.14
8.22%
Citigroup (NYSE:C)
$18.99
6.74%
Pfizer (NYSE:PFE)
$19.11
6.70%
AT&T (NYSE:T)
$31.99
5.00%
Verizon (NYSE:VZ)
$35.12
4.90%
General Electric (NYSE:GE)
$28.10
4.41%
Merck (NYSE:MRK)
$35.67
4.26%
AIG (NYSE:AIG)
$21.49
4.09%
JPMorgan Chase (NYSE:JPM)
$38.49
3.95%
DuPont (NYSE:DD)
$44.44
3.69%
Data as of market close August 29, 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.

Best of Breed - DuPont
Delaware-based DuPont has been typecast as just a chemical company, but the bottom line is that the company has brought us so many things over the years that we pretty much take for granted ranging from Kevlar to Corian, which adorns kitchens throughout the world (the Corian not the Kevlar).

DuPont's recent earnings piqued my interest. The company is coming off a solid second quarter where it had earnings per share of $1.11 excluding items. That was a respectable four cents north of analyst expectations.

Another interesting point is that DuPont expects sales of solar photovoltaic to more than triple within five years, which would put them over $1 billion. DuPont is also partnering with Genencor, a division of Denmark-based Danisco AS, on a three-year, $140 million project to develop and commercialize cellulosic ethanol. The company's efforts in this area are likely to capture a good amount of attention going forward among the investment community. I'm also hoping it will attract some upbeat research from the sell side.

Optimistic Guidance
It's not just where DuPont has been that's interesting, it's where DuPont may be headed. At present, the company is expected to earn $3.54 per share this year and $3.68 per share next year. These are attractive earnings numbers for a stock that trades at about $45. It means that the company trades at about 12.8-times the current year estimate and has a forward price-to-earnings of 12.2. The shares also carry a small dividend. The current yield is 3.7%.

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.)

comments powered by Disqus

Trading Center