EmailThe high-quality, high-dividend stock approach Briefing.com has been advocating the past two years has paid off well. The Dogs of the Dow investing strategy, an approach similar to what we have recommended, returned 17% in 2011.
Dogs of the Dow
The Dogs of the Dow investing theory has been around for a long time. It is not by any means our creation.
It involves investing, at the beginning of each year, in equal weights in the 10 Dow 30 industrial stocks with the highest dividend yield.
The strategy essentially involves buying safety through a high-dividend yield coupled with buying stocks that are out of favor.
Briefing.com, and your current author in particular, are proponents of both of these strategies. We have long emphasized that everyone says "buy low, sell high" but almost no one does it. The Dogs of the Dow strategy provides the discipline to adopt that approach.
The Dogs strategy tends to do well during difficult market conditions. However, when the market is running very strong, momentum stocks and high P/E stocks tend to outperform.
When bear markets hit, the Dogs strategy tends to outperform, but only because the high-dividend stocks decline less than the broader market and provide an offset through the dividend yield.
The time when it is best to adopt the Dogs strategy is in choppy, grinding market conditions like last year. Similar conditions may prevail in 2012.
2011 Performance
The Dogs returned a total 17% in 2011. The stocks rose 12% and dividends provided another 5%.
The S&P 500 was flat in 2011, with a 2% dividend return. The Nasdaq fell 1.8%. Financial stocks fell 18%.
It was the high-quality, high-dividend stocks that provided by far the best returns in 2011.
Here are the stocks that were in the Dogs for 2011 with the price and yield at the beginning of 2011, as well as the closing price at the end of 2011. The strategy involves using the stock as of the start of the year and sticking with it all year.
| Company | 12/31/10 Price | Yield | 12/31/11 Price |
|
AT&T |
29.38 | 5.85% | 29.8 |
| Verizon | 35.78 | 5.46% | 40.12 |
| Pfizer | 17.51 | 4.57% | 21.64 |
| Merck | 36.04 | 4.22% | 37.7 |
| Kraft | 31.51 | 3.68% | 37.76 |
| Johnson & Johnson | 61.85 | 3.49% | 65.58 |
| Intel | 21.03 | 3.42% | 24.25 |
| DuPont | 49.88 | 3.29% | 45.78 |
| McDonald’s | 76.76 | 3.18% | 100.33 |
| Chevron | 91.25 | 3.16% | 106.4 |
There were clearly some strong winners in this group. McDonald's, Kraft, Chevron, and Intel stand out.
Dogs for 2012
Here are the Dogs for 2012. Today's price and yields have been used.
| Company | 12/31/11 Price | Yield |
| AT&T | 29.68 | 5.90% |
| Verizon | 38.33 | 5.20% |
| Merck | 38.47 | 4.40% |
| Pfizer | 21.57 | 3.70% |
| General Electric | 18.65 | 3.60% |
| DuPont | 46.04 | 3.60% |
| Johnson & Johnson | 64.83 | 3.50% |
| Intel | 25.25 | 3.30% |
| Procter & Gamble | 66.36 | 3.20% |
| Kraft Foods | 37.5 | 3.10% |
Note: On Aug. 4, 2011, Kraft announced a plan to create two independent public companies: a high-growth global snacks business and a high-margin North American grocery business. The company's target is to have this split completed before year-end 2012.
Briefing.com is not specifically advocating a strict Dogs strategy for 2012, but it probably wouldn't be the worst decision for many investors.
For conservative investors willing to trade upside potential for safety and yield, all of these Dogs stocks could well appeal.
The Briefing.com outlook for 2012 takes into consideration more optimistic scenarios, as regular Big Picture readers recognize. If the overall market posts solid gains in 2012, some of the Dogs may prove good yield investments but with returns that underperform the overall market. Other Dogs stocks, though, still offer safety and yield with greater upside potential.
For example, General Electric, DuPont, and Intel could benefit from improving economic conditions and rising price/earnings multiples if the overall market rallies.
Johnson & Johnson and Procter & Gamble might also have some additional upside for the more risk-tolerant investor.
AT&T, Verizon, Merck, Pfizer, and Kraft are more traditional defensive stocks that probably have less upside potential if overall economic and market conditions develop, but offer solid yields and safety.
Long-Term Returns
The Dogs strategy works best in down or stagnant markets, and less well in strong, momentum-driven markets.
Nevertheless, the long-term gains are impressive as the annual return since 1973 is 17%, in line with last year's gains, according to the web site dogsofthedow.com.
What It All Means
The perpetual pessimists missed a huge opportunity in 2011.
A 17% return is rare for almost any condition and any investor. Yet, it was achieved by those who adopted the Dogs approach for 2011, despite this being a risk-averse portfolio approach.
This past year was a great year for investors who did not exit the market entirely out of fear but rather moved to high-quality, high-yield stocks.
This approach has worked for years for long-term investors, and it is highly worthy of consideration as a strategy for 2012.
