Dogs of the Dow: No longer a winning strategy?

The worst performers one year turn into the better performers the next -- at least in theory.

By Wall St. Cheat Sheet Dec 27, 2012 4:06PM
Digital Vision Getty ImagesBy Eric McWhinnie

There are countless strategies to employ when investing in stocks, but one of the easiest and most well-known strategies is Dogs of the Dow.

The strategy requires investors to buy an equal amount of the 10 highest yielding stocks found in the Dow Jones Industrial Average ($INDU) at the beginning of the year. The 10 stocks are then replaced at the beginning of the next year with the new highest yielding stocks in the Dow.

It can be difficult for some investors to stomach this strategy because investors are only paying attention to dividend yields rather than the many other fundamental factors. But the idea behind this strategy is that a high-yielding stock could be at the bottom of its business cycle and may have been oversold.

Historically, this strategy paid well, but not so in 2012. Excluding dividends, the 10 Dogs of the Dow for 2012 have gained an average of only 5.9% year-to-date, compared to 12.5% in 2011. The only 'dogs' to post declines for the year are DuPont and Intel. DuPont, incidentally, was also the only 'dog' to post a decline in 2011 as well. In comparison, the non-dogs are up an average of 13.3% this year, similar to the S&P 500 (SPY), which is up about 13%.

The 10 Dogs of the Dow for 2012 and their returns as of December 26 are listed below:

AT&T (T) 11.7%
Verizon Communications (VZ) 8.3%
Merck & Co. (MRK) 9.7%
General Electric (GE) 16.0%
Pfizer (PFE) 16.6%
DuPont (DD) -1.5%
Johnson & Johnson (JNJ) 7.0%
Intel (INTC) -15.0%
Procter & Gamble (PG) 1.9%
Kraft Foods (MDLZ) 3.9%

Investors employing the dog strategy for 2012 missed large gains in Dow components such as Home Depot (HD) and Disney (DIS), but also avoided the biggest losers such as Hewlett-Packard (HPQ) and McDonald's (MCD). Bank of America (BAC), the biggest blue-chip loser in 2011, turned out to be the best performing Dow member in 2012, with a surge of 107.6%.

Kraft Foods, which was added to the Dow index in 2008, was replaced in September by UnitedHealth Group (UNH) after Kraft spun off its North American grocery business.

Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.

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