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 lagging dogs might provide capital appreciation as well as an above-average income stream, and that the investments will be made in large, relatively stable businesses.
Dog theorists note that the components should all be relatively strong businesses and liquid equities. In 2011, the Dogs of the Dow outperformed the broader market as defined by the DJIA and S&P 500. The 2011 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.
The 2012 dogs, AT&T (T), DuPont (DD), General Electric (GE), Intel (INTC), Johnson & Johnson (JNJ), Kraft (KFT), Merck (MRK), Pfizer (PFE), Procter and Gamble (PG) and Verizon (VZ) are a more varied group of equities than the 2011 group. The last group was noticeably absent any equity from the financial sector. Historically, financials were often members of the dogs, but most had to reduce their dividends in 2008 and 2009, taking them out of dog range. General Electric raised its dividend by about 70 percent over the last year and its inclusion within the 2012 dogs brings with it some significant financial exposure, as well as several industries not represented last year.
Like the broader market, many of the 2012 Dogs have recently performed exceedingly well during the last few months. See the 2012-to-date, one-month and three-month performance rates, as well as the current yields, compared to the same for the S&P 500 and Dow Jones Industrial Average, below:
In 2011, as well as within the past one and three months, the dogs outperformed both index benchmarks, while also providing more than double the yield of the S&P 500. Also so far within 2012, DuPont is by far the best performing 2012 Dog of the Dow, though it was the worst performing 2011 of the Dow.
One point of concern about these dogs, as well as most investments within the broader market, is that so many of the major equities are at or near their 52-week highs. 2011 was a very volatile year and it appears likely that 2012 will be similarly volatile, as issues such as European sovereign failures, Middle-Eastern revolts, U.S. fiscal policy and potential Asian cooling could all sway the broader market and these major business.
Disclosure: 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. I am long GE, INTC, KFT.