The strategy is nothing new, but it has proved to be a relatively safe way to invest, and produces more current income than most portfolios. It’s the “Dogs of the Dow,” a strategy credited to Michael O’Higgins as outlined in his 1992 book Beating the Dow.
If you’ve been barking up the investment tree for a while you surely have heard of this investment approach, and may have even tried it. The idea is to buy the highest dividend yielding stocks in the Dow Jones Industrial Average at the end of the year, putting an equal amount into each of the ten highest yielding stocks.
A variation on the theme focuses on just the top five stocks. Another variation cautions against buying the highest yielding stock, on the theory that the high yield is too good to be true—the company may have hidden problems that could cause it to cut its dividend. With this variation you skip the highest yielder and invest in the next nine, or the next four.
O’Higgins studied a 17-year time frame in the 1970s and 80s, and found the Dogs beat the Dow with an average annual return of 17.9 percent versus 11.1 percent. But the Dogs don’t work all the time. They have beaten the Dow in only 7 of the last 12 years. However, the strategy certainly worked this past year. The ten highest yielding stocks at the end of 2010 produced a return of about 13 percent for 2011, compared to less than 6 percent for the entire DJIA and virtually nothing for the S&P 500.
Here’s what you’d get if you put the strategy into place for 2012, starting with the highest yielding stock.
1. AT&T (T) at $30.24 yields 5.8 percent. The big telephone company is a lumbering giant but will likely keep calling in enough profit to maintain its dividend.
2. Verizon (VZ) at $40.12 yields 5 percent. This telephone company is slightly smaller, with a little less yield, but it dials in higher customer satisfaction ratings.
3. Merck (MRK) at $37.70 yields 4.5 percent. The pharmaceutical company survived problems with its arthritis drug Vioxx, then in 2009 merged with rival Schering Plough.
4. General Electric (GE) at $17.91 yields 3.8 percent. The conglomerate makes everything from wind turbines to the GE Profile refrigerator in your kitchen. The stock tumbled in the 2008 meltdown but is trying to claw back to blue chip territory.
5. Pfizer (PFE) at $21.64 yields 3.7 percent. This pharmaceutical company is famous for Viagra but also makes Advil and more than a hundred other medicines.
6. DuPont (DD) at $45.78 yields 3.6 percent. The major chemical and agricultural company has the distinction of being headed up by a woman.
7. Johnson & Johnson (JNJ) at $65.58 yields 3.5 percent. The largest U. S. healthcare concern produces drugs, medical equipment, and consumer products. The company had manufacturing problems last year, but its strong balance sheet still allowed it to raise the dividend.
8. Intel (INTC) at $24.25 yields 3.5 percent. The California company cooks up the chips that power your computers. The Silicon Valley stalwart has lots of cash and only a little debt, and has recently made a habit of raising its dividend.
9. Procter & Gamble (PG) at $66.71 yields 3.1 percent. The consumer products company makes everything from Head & Shoulders shampoo to Pampers to Bounty paper towels. It sells products in 180 countries, and counts Warren Buffett among its fans.
10. Kraft (KFT) at $37.36 yields 3.1 percent. This is another Buffett favorite, international powerhouse, and is headed up by a woman. It purveys a complete menu of food products for breakfast, lunch, dinner, and everything in between.
If you don’t want to invest in individual stocks, you might consider the Deutsche Bank-sponsored Elements Dogs Exchange Traded Note (DOD), which unfortunately is thinly traded and could prove more volatile, or the Hennessy Total Return mutual fund (HDOGX) that roughly follows a Dog strategy.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.