The Dogs of the Dow theory presumes that investing in the 10 Dow Industrial components that enter a calendar year with the highest yields is a prudent investing strategy. The strategy presumes the Dogs are lagging and that they might provide capital appreciation as well as an above-average income stream.
The theorists note that these components should all be relatively strong companies, by their inclusion in the Dow. The 2011 Dogs all entered the year with a yield of at least 3%, while the S&P 500 (NYSEARCA:SPY) average dividend is currently approximately 1.9% and the Dow Jones Industrial Average (NYSEARCA:DIA) is yielding about 2.44%. So far this year, and through the recent sell-off, the 2011 Dogs have outperformed the broader market.
Generally, some companies stay Dogs, while some others stop becoming Dogs and an equal amount become new Dogs each year. Today, there are 13 companies in the Dow that yield over 3%. McDonald's (NYSE:MCD), which is a 2011 Dog, now yields about 2.8%. On the strength of MCD's appreciation by over 17% so far within 2011, it appears likely that MCD will not be a 2012 Dog.
At the moment, four Dow components that were not 2011 Dogs yield more than McDonald's, including General Electric (NYSE:GE), which now yields about 4%. General Electric now has a higher yield than half of the 2011 Dogs and appears poised to become a 2012 Dog. Additionally, Procter & Gamble (NYSE:PG) now yields about 3.4% and Travelers (NYSE:TRV) now yields about 3.3%, and either are potential 2012 Dow Dogs. Home Depot (NYSE:HD) also now yields over 3%, and could potentially become a 2012 Dog.
In addition to McDonald's, Chevron (NYSE:CVX) now yields about 3.2% and Kraft (KFT) yields about 3.4%. Either could be replaced by General Electric, Travelers or Procter & Gamble, and potentially Home Depot. Much of this list-making will depend upon market activity, dividend declarations and other corporate matters released between now and the end of the year.
One great thing about figuring out which Dow components may be crowned 2012 Dogs is that the Dow components are reasonably familiar to the average American, and they will find it easy to obtain news and information on them. Further, the companies are highly liquid, and investors probably do not have to fear being unable to sell their shares at a fair market price. Additionally, all of these potential new Dogs yield considerably more than the broader market.
Disclosure: I am long KFT.