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The “Dogs of the Dow” is a screening strategy where investors buy and hold the highest yielding dividend stocks of the Dow Jones Industrial Average for the calendar year. The idea is relatively simple and the data indicates that on average it outperforms the Dow. Since the early 1970s, the Dogs of the Dow strategy has averaged approximately 600 basis points above the Dow Jones Industrial Average, or nearly 18% per annum. Investors concerned about a choppy 2012 due to the macro economic environment can use a simple options strategy to augment their dividend income in 2012.

Investors looking for incremental gains should couple their Dogs of the Dow strategy with a covered call strategy to increase cash flow. The dividend equities below are coupled with selling January 2013 expiration covered calls around 10% out-of-the-money. The average yield for the dogs portfolio is 17.1%.

Dogs of the Dow for 2012

(Click to enlarge)

  • General Electric Company (NYSE:GE)

Market Capitalization: $195.5 billion

Price to Earnings: 15.1x

Dividend Yield: 3.8%

Enterprise Value / EBITDA: 18.0x

  • Intel Corporation (NASDAQ:INTC)

Market Capitalization: $127.8 billion

Price to Earnings: 10.8x

Dividend Yield: 3.4%

Enterprise Value / EBITDA: 5.2x

  • Johnson & Johnson (NYSE:JNJ)

Market Capitalization: $178.8 billion

Price to Earnings: 16.0x

Dividend Yield: 3.5%

Enterprise Value / EBITDA: 8.6x

  • Merck & Company, Inc. (NYSE:MRK)

Market Capitalization: $116.8 billion

Price to Earnings: 28.0x

Dividend Yield: 4.4%

Enterprise Value / EBITDA: 6.2x

  • Pfizer, Inc. (NYSE:PFE)

Market Capitalization: $167.3 billion

Price to Earnings: 17.0x

Dividend Yield: 4.0%

Enterprise Value / EBITDA: 6.8x

  • Procter & Gamble Company (NYSE:PG)

Market Capitalization: $183.8 billion

Price to Earnings: 16.9x

Dividend Yield: 3.1%

Enterprise Value / EBITDA: 11.6x

  • Kraft Foods Inc. (KFT)

Market Capitalization: $66.1 billion

Price to Earnings: 20.0x

Dividend Yield: 3.1%

Enterprise Value / EBITDA: 10.9x

Source: Covered Call Strategy With The Dogs Of The Dow