2012 Dogs Of The Dow Show Strong Potential For Appreciation, Dividend Growth

by: Zvi Bar

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, and that the investments will be made in large, relatively stable businesses.

The theorists note that these components should all be relatively strong companies, by their inclusion in the Dow. The Dow dogs outperformed the broader market as defined by the DJIA and S&P 500. The dogs combined to appreciate 12.08 percent, above a 5.37% appreciation by the Dow 30 and a -0.20% loss for the S&P 500. Moreover, the 2011 dogs provided an average yield of 3.87 percent, which was well above either index.

Below is a table of the 2011, 2-year and 5-year equity performance of the 2012 dogs, not counting dividends paid, as well as their present yields.

The 2012 dogs are very similar to the 2011 list, with General Electric (NYSE:GE) and Procter & Gamble (NYSE:PG) being the new additions, as McDonald's (NYSE:MCD) and Chevron (NYSE:CVX) exited the group. McDonalds was the best performing Dow dog in 2011, appreciating 30.71 percent. Though General Electric was not a dog in 2011, it enters the 2012 list with the fourth-highest dividend, having grown its quarterly dividend by 70 percent in the last two years.

Other returning Dogs of the Dow also had strong dividend growth in 2011. Intel (NASDAQ:INTC) raised its quarterly dividend by 33.33 percent in 2011, and Pfizer (NYSE:PFE) raised its dividend by 11.11%. Meanwhile, members Pfizer and Kraft (KFT) put up strong equity returns that helped the 2011 dogs outperform the benchmarks even when excluding the superior yield.

The dogs often combine to make a reasonably diverse, yet conservative portfolio, with a domestic, international and emerging market profile, but any year's dogs will not be a perfectly diverse or complete long-term portfolio. For example, in 2012 the dogs gained some financial exposure via conglomerate GE's significant financial division, but lost Chevron and its oil and gas exposure.

Another great thing about the Dogs of Dow theory is that the companies are usually familiar to American consumers, 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, whatever that may be.

Disclosure: I am long KFT.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.