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Tickers in this Article: BAC, PFE, C, GM, VZ, T, MRK, GE, JPM, DD, CFC
The Dogs of the Dow is an investment strategy popularized in the early 1990s by Michael O'Higgins in his book Beating The Dow. 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 some, 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, and we can sift through some of 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)
.44
8.7%
Pfizer (NYSE:PFE)
.73
7.2%
Citigroup (NYSE:C)
.89
6.4%
General Motors (NYSE:GM)
.76
6.4%
Verizon (NYSE:VZ)
.63
4.7%
AT&T (NYSE:T)
.39
4.4%
Merck (NYSE:MRK)
.40
4.3%
General Electric (NYSE:GE)
.05
4.3%
JP Morgan Chase (NYSE:JPM)
.01
4.0%
DuPont (NYSE:DD)
.31
3.5%
*Market data as of June 12, 2008
As alluded to above, the traditional Dog strategy would not be recomended 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 off some of the better stocks of the bunch and consider adding those to a portfolio.

Picking The Best of Breed
You may notice that all three of the largest banks in the United States are Dogs. With the year we have had, this is not at all surprising. Citigroup has had a terrible year and will be licking its wounds for a while. The company has already cut its dividend drastically, so the yield going forward may not be as stable. Bank of America is the biggest Dog, but may see some more choppy waters ahead with its deal for Countrywide Financial (NYSE:CFC). The best bet with the banks looks to be JP Morgan Chase. The company has held up the best in the sector, and despite the trouble it will have integrating Bear Stearns into the mix, it will benefit the company in the long term.

General Electric catching a lot of flak recently from disappointing results, but its diversity and global presence will help it better endure a weak U.S. economy. The stock has been taken down too much, and has the potential for a lot of upside.

Chemical company Dupont and pharmaceutical company Merck are the last two picks from the Dogs. Dupont has seen a lot of cost inflation, but its recent move to up prices shows that it is in a position to pass on many of those costs to the customer. Merck's share price has been brutally taken down this year, and there is potential for the shares to recapture some of it. The concern is that it cold end up a perpetual Dog like Pfizer.

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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