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The Dow10 strategy calls for investing in 10 of the highest dividend yielding stocks in the DJIA. At the end of the year, the portfolio is reconstructed to include the prior year’s dividend champions.

In his book Stocks for the Long Run, Professor Jeremy Siegel mentions the Dow10 strategy as one of the most successful investment strategies. We back tested this strategy using the past decade’s data. The dividend champions include DuPont (NYSE:DD) (10 years) and JP Morgan Chase (NYSE:JPM) (9 years), followed by AT&T (NYSE:T), General Motors (NYSE:GM), Altria (NYSE:MO) (8 years). Here are our results:

The table below shows the dividend yields and capital appreciation for the Dow10 stocks.

Year

Dividend Yield

Capital Appreciation

Net Return

2001

3,45%

-7,8%

-4,35%

2002

4,09%

-12,2%

-8,11%

2003

3,35%

23,6%

26,95%

2004

3,87%

0,5%

4,37%

2005

4,77%

-8,9%

-4,13%

2006

3,59%

24,8%

28,39%

2007

4,19%

-1,4%

2,79%

2008

4,98%

-41,6%

-36,62%

2009

3,25%

12,9%

16,15%

2010

3,87%

15,5%

19,37%

Over the same period, the returns from the DJIA are as follows:

Year

Dividend Yield

Capital Appreciation

Net Return

2001

1,95%

-7,1%

-5,15%

2002

2,47%

-16,8%

-14,33%

2003

2,12%

25,3%

27,42%

2004

2,3%

3,1%

5,42%

2005

2,67%

-0,6%

2,07%

2006

2,34%

16,3%

18,64%

2007

2,6%

6,4%

9%

2008

3,81%

-33,8%

-29,99%

2009

2,55%

18,8%

21,35%

2010

2,57%

11%

13,57%

The ten-year cumulative return for the DJIA portfolio is 40% whereas the Dow10 portfolio’s return is only 30%.

Actually, the Dow10 strategy was doing fine until the financial crisis. Two of the biggest losers in the DJIA were also part of the Dow10 portfolio: Citigroup (NYSE:C) lost 77% and General Motors (GM) was off 87% in 2008. If we take transaction costs into account, the Dow10 returns would be slightly smaller. After tax, returns of the Dow10 strategy are also worse than the returns of a portfolio that passively invests in Dow 10 stocks.

Jeremy Siegel might be right in that the Dow stocks with the highest dividends had higher returns in the past, but that wasn’t the case during the past decade. If you agree with Jeremy Siegel, here are the 10 members of the DJIA with the highest dividend yields in 2010:

2010 Yield

YTD Return

1 - AT&T (T)

5.7%

9.4%

2 - Verizon (NYSE:VZ)

5.3%

7.7%

3 - Merck (NYSE:MRK)

4.2%

0.8%

4 - Pfizer (NYSE:PFE)

4.1%

21.1%

5 - Kraft Foods (KFT)

3.7%

15.8%

6 - Johnson & Johnson (NYSE:JNJ)

3.4%

11.1%

7 - EI DuPont de Nemours (DD)

3.3%

12.3%

8 - Chevron (NYSE:CVX)

3.1%

16.9%

9 - Intel (NASDAQ:INTC)

3.0%

10%

10 - McDonald’s (NYSE:MCD)

2.9%

13.6%

The DJIA returned 9.1% since the end of 2010. Eight of the Dow10 stocks managed to beat the DJIA. These stocks returned 11.9% so far in 2011 and outperformed the rest of the Dow stocks by more than 3 percentage points. It seems like they made a comeback.

The best performing stock in this bunch was Pfizer (PFE) which was one of the three high dividend stocks favored by hedge funds. Chevron (CVX) returned nearly 17%. Intel (INTC) recently boosted its quarterly dividend to $0.21, so its yield now approaches 4%. Bill Miller and billionaire investor Jim Simons are very bullish about INTC (Check out Jim Simons' other favorite stock picks).

We like high dividend stocks and urge investors to consider these at least as an alternative to ultra-low yielding 10-year Treasuries.

Disclosure: I am long T.

Source: High Dividend Dow Components Made a Huge Comeback