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The Dow 10 Strategy is one of the most simple stock-picking techniques. I first read about this strategy in professor Jeremy Siegel's book Stocks for the Long Run. The strategy is based on picking the top 10 dividend stocks among the Dow Jones industrials. Also known as the "Dogs of the Dow," these stocks have a tendency to outperform broader market indices. Siegel suggests that this simple strategy has done remarkably well over the last 50 years, as such:

-- The Dow-Jones Industrial Average has outperformed the S&P index.

-- The return of the Dow 10 strategy is much better than the Dow industrials.

-- Historically, this strategy has provided investors with a 14.43% return, about 2.5% per year higher than the Dow 30, and accumulating to $493,216, about 2.5 times that in the Dow 30.

As fellow Seeking Alpha contributor Zvi Bar suggests, the Dow Dogs vastly outperformed the broader markets in 2011:

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 dogs now provide an average yield of 3.87 percent, well above either index.

I also believe in the power of dividends. Even if the markets head to the south, dividends can provide a soft cushion against capital losses. In fact, high-dividend companies tend to be pretty defensive with very low Beta values. Given the near zero interest rates, it is very likely that the Dow 10 stocks will keep outperforming broad market indices in 2012, as well. For those interested in applying the Dow 10 strategy for this year, here is a list of the Dow Dogs:

Company

P/E

Yield

Payout Ratio

O-Metrix

My Take

AT&T, Inc.

15.42

5.79%

87.00%

3.46

Hold

Verizon

15.96

5.03%

78.58%

4.98

Buy

Merck & Co. Inc.

26.23

4.39%

103.19%

2.57

Hold

Pfizer Inc.

17.3

4.01%

60.54%

2.64

Hold

General Electric

15.05

3.70%

47.38%

6.39

Buy

Du Pont

12.64

3.53%

44.07%

5.62

Buy

Johnson & Johnson

16.07

3.46%

53.32%

3.37

Hold

Intel Corporation

10.62

3.42%

30.30%

6.71

Buy

Procter & Gamble

16.96

3.14%

48.59%

3.74

Hold

Kraft Foods Inc.

20.37

3.11%

63.21%

3.61

Hold

Data from Finviz/Morningstar, and is current as of December 4. You can download O-Metrix calculator, here.

I also estimated the O-Metrix scores of these stocks based on the following formula:

O-Metrix = 5 x (Dividend Yield + Expected Growth) / PE Ratio

I multiplied the original formula, suggested by Peter Lynch, to get a scale over 10. As an investor, our mission is to find companies with 10+ grades. It is a hard challenge. However, any company with 5+ grade is also great. Therefore, looking at the list above, I particularly rate Intel (INTC), DuPont (DD), and General Electric (GE) as strong buys with solid upside potential in 2012.

Both telecom giants, Verizon (VZ), and AT&T (T) made it to the Dogs of the Dow list. I am a big fan of telecom stocks with solid dividends. AT&T was my favorite pick for the last year. However, after the blow out of T-Mobile deal, I lost my confidence in the management. The break-up bill of $4 billion will result in lower-than-expected profits in the balance sheet. The acquisition cost of near $1.8 billion for the Qualcomm's 700Mhz spectrum will also add more pressure on the income statement, making the stock look more expensive, compared to its peers. Therefore, Verizon seems to offer a better deal for this year.

Three healthcare giants made it to the list above. Merck (MRK), Pfizer (PFE), and J&J (JNJ) offer yields of 4.39% ,4.01%, and 3.46%, respectively. 2011 was a pretty volatile year for the equities. Investors, looking for safety, flooded into low beta stocks in relatively defensive sectors, driving up the valuations. These three stocks are great ways to play defense, but I think it is time to go offensive in 2012. Therefore, I rate these three stocks as hold.

P&G (PG) and Kraft Foods (KFT) are the last two companies among the list above. P&G is a safe company that operates as a global provider of consumer packaged goods. It is a great stock with a low Beta of 0.45. However, at a trailing P/E ratio of 16.96, the stock looks little bit pricey. Kraft is also involved in packaged goods business, but its specialty is processed food manufacturing. After returning near 22% in the last year, Kraft also looks relatively expensive compared to other stocks. Therefore, I rate both companies as hold.

Source: Dogs Of The Dow: 4 To Buy, 6 To Hold