Filed Under:
Tickers in this Article: PFE, GE, INTC, T, KFT
Ready to unload 2010's portfolio and reload it with 2011's "Dogs of the Dow"? If so, here's a primer for you - a list of the highest- (dividend) yielding stocks in the Dow Jones Industrial Average as of December 15, 2010. Though the lineup could technically change between now and the end of the year, it's not apt to change by much.

IN PICTURES: 5 Tips To Reading The Balance Sheet

Method to the Madness
The Dogs of the Dow theory is a straight-forward one; the 10 stocks of the Dow's 30 that offer the highest dividend yield as of the end of the calendar year are the dogs, and also happen to be the 10 stocks most likely to lead the Dow in the following year.

In simpler terms, it's a search for value, and assumes undervalued names in one year will catch up with their value in the next year, and outperform the overall market in the process.

Company Name
Dividend Yield
Dividend 12-Month Totals
Current Price
AT&T Inc. (NYSE:T)
5.73%
$1.68
$29.15
Verizon Communications Inc. (NYSE:VZ)
5.62%
$1.95
$34.65
Pfizer Inc. (NYSE:PFE)
4.68%
80 cents
$17.06
Merck & Co., Inc.(NYSE:MRK)
4.16%
$1.52
$36.47
Kraft Foods Inc. (NYSE:KFT)
3.7%
$1.16
$31.30
Johnson & Johnson (NYSE:JNJ)
3.44%
$2.16
$62.97
Intel Corporation (Nasdaq:INTC)
3.35%
72 cents
$21.31
E.I. du Pont de Nemours & Co. (NYSE:DD)
3.34%
$1.64
$49.17
Chevron Corporation (NYSE:CVX)
3.26%
$2.88
$88.06
General Electric Company (NYSE:GE)
3.17%
56 cents
$17.54
Before You Pull the Trigger
Sounds good, right? Nothing wrong with any blue chip, after all. But as good at it looks, the strategy isn't bulletproof. In fact, it's about as apt to not work as it is to work.

For 2010 so far, the dogs are up 13% versus only a 9.4% gain for the DJIA. Prior to 2010, however, the dogs had only topped the DJIA's results in nine of the 22 years leading up to 2010. And on a net total basis for those, 22 years, the Dow itself beat an all-dogs strategy. So why bother at all? Because the premise itself isn't flawed. This may just be a case where a flawless execution of a strategy has pushed reason and common sense so far to the side that we may as well be throwing darts.

A Better Approach
One of the well-received tweaks to the Dogs of the Dow strategy has been the introduction of the "Small Dogs". These are the five lowest priced stocks of the 10 dogs for the new year, which are assumed to be better geared for even-bigger percentage gains. For 2011, that looks like it's going to be Pfizer, General Electric, Intel, AT&T, and Kraft Foods.

Even so, such a strategy would have only beat the Dow in 12 of the prior 22 years, and it looks like 2010 isn't going to be a win for the Small Dogs strategy either.

So what's going wrong here? The idea of a value-hunt is fine. The notion that December 31 is the ideal time to buy five or 10 new stocks (and presumably sell 10 others) based on dividend yield and/or price level alone isn't fine.

Timing an entry into a good stock or out of a bad one is half the battle, even for true long-term investors. A flawless entry into a Dogs of the Dow portfolio, however, essentially ignores any sort of timing sensibilities (which is somewhat the point, but still disadvantageous). It also ignores the distinct possibility that some of these stocks may well be weak for a valid reason that's not going to let up anytime soon.

The Bottom Line
The best approach here may be to use the Dogs theory as a starting point, but not an end to your analysis. Earnings growth, sector rotation, technical soundness and goodwill within the market are all important factors that you can't afford to ignore even if the Dogs of the Dow theory does. Or, maybe the solution is as simple as not insisting you buy any of these stocks precisely at the end of the year or the beginning of the next. (For related reading, see Barking Up The Dogs Of The Dow Tree.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center