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All signs are pointing to 2011 being a good year for the stock market. Ok, maybe not all signs, but enough to make investors fairly optimistic. It’s likely that this year investors that have remained on the sidelines since the market crash of 2008 will finally start getting back into stocks.

This time around these investors are going to be more conservative and not chase the sexy growth stocks that capture most of the headlines. Fortunately for them, there are scores of great dividend stocks available with which to build a stable portfolio. Even more fortunate for them is that dividend stocks have tended to outperform the broader market indices.

A study originally done by John Slatter in the 1980s focused on the “Dogs of the Dow” and their unusually high performance. The Dow 10 strategy as it is known states that those investing in the 10 highest yielding stocks in the Dow Jones index tend to outperform the overall market. This includes outperforming the Dow Jones index and the broader S&P 500 index.

From 1928-1997, the Dow 10 strategy produced annual returns of 13.2% compared to only 10.6% from the S&P 500.

Many people subscribe to the Dogs of the Dow theory, but most investors probably don’t realize that the majority of the benefit of this Dow 10 strategy comes in the month of January. Historically, the dogs of the Dow have outperformed the boarder Dow Jones index by 1.7% in the month of January alone. A successful Dow 10 strategy requires investors to take advantage of this January effect.

For dividend investors wanting to capitalize on the Dow 10 strategy this year, here are the 10 highest yielding Dow stocks to add to your portfolio.

  1. AT&T (NYSE:T) – 5.7% yield
  2. Verizon (NYSE:VZ) – 5.3% yield
  3. Merck (NYSE:MRK) – 4.2% yield
  4. Pfizer (NYSE:PFE) – 4.1% yield
  5. Kraft Foods (KFT) – 3.7% yield
  6. Johnson & Johnson (NYSE:JNJ) – 3.4% yield
  7. EI DuPont de Nemours (NYSE:DD) – 3.3% yield
  8. Chevron (NYSE:CVX) – 3.1% yield
  9. Intel (NASDAQ:INTC) – 3.0% yield
  10. McDonald’s (NYSE:MCD) – 2.9% yield

The 2011 dogs of the Dow have an average dividend yield of 3.9% which is well above the 1.7% average yield on the stocks in the S&P 500. Wall Street analysts are forecasting an 8-10% rise in the stock prices of these 10 dividend stocks. However, when you include their $% dividend yield that could produce an annual return of 12-13%. That’s not too shabby a return for simply investing equally in the 10 highest yielding Dow stocks.

Disclosure: No positions

Source: The Dow 10: A Dividend Stock Strategy for 2011