Time For The Dogs Of The Dow

Dec. 4.06 | About: General Electric (GE)

One of the oldest and best investing systems around is the “Dogs of the Dow”. And it is simple to implement. On the last trading day of the year, you invest equal dollar amounts in the ten Dow stocks which have the highest dividend yield. Then you hold these ten stocks all year and repeat the process every December. Over time, even though there have been many bad years, this system has beaten the Dow’s performance by a wide margin.

Now the Dow is an obsolete stock index which consists largely of supersized turkeys with little growth potential, but the Dogs of the Dow still works. Why? It incorporates several timeless principles for successful investing: everything else being equal, stocks which pay good dividends will outperform those which do not; it pays to invest in stocks which are out of favor; the end of December is a good time to pick up bargains due to year-end tax-loss selling; and over time, stocks provide an inflation-adjusted average annual return of 7% (see this post from the excellent blog, Crossing Wall Street by Eddy Elfenbein).

This year’s buy date for the Dogs is Friday, December 29. Now that it is December we will study the list weekly. I already own all of these companies, either directly or through mutual funds, and it is not my intention to buy the whole list. (If I were more ambitious, I would have to start an ETF for the Dogs of the Dow!) But if conditions warrant I might increase my investment in selected names. Here are this year’s candidates in order of yield. Of course, the list may change during the next four weeks. I have added each stock’s beta to facilitate analysis.

Symbol Company Price Yield Beta
(NYSE:VZ) Verizon 34.64 4.68% .92
(NYSE:MO) Altria 84.00 4.10% .86
(NYSE:C) Citigroup 49.38 3.97% .86
(NYSE:T) AT&T 34.00 3.91% .87
(NYSE:PFE) Pfizer 27.86 3.45% 1.04
(NYSE:MRK) Merck 45.06 3.37% .48
(NYSE:GM) General Motors 29.69 3.37% 1.50
(NYSE:DD) DuPont 46.45 3.19% 1.12
(NYSE:JPM) JP Morgan Chase 46.01 2.96% 1.08
(NYSE:GE) General Electric 35.28 2.83% .84

My first observation is that since the market has reached such lofty levels this year, the stocks with betas greater than 1.0 should not be purchased unless a sharp market correction occurs by December 29. This rules out DD, which might be attractive otherwise. Among the remaining six stocks only GE looks even mildly interesting to me at these price levels.