The Dogs of the Dow theory is an investing strategy that presumes investing in the ten highest yielding Dow Industrial components at the start of each year is a prudent investing strategy. This strategy is based on the idea that the higher yielding components are laggards that could catch up and provide capital appreciation, and that they should also provide an above-average income stream.
Moreover, because all Dow Dogs are DJIA components, the investments will all be large and liquid equities. In 2011, the Dogs of the Dow outperformed the broader market as defined by the DJIA and S&P 500, with the 2011 dogs combining to appreciate by 12.08 percent, well above the 5.37% appreciation by the Dow 30 and a 0.20% decline for the S&P 500. Further, the 2011 dogs provided an average yield of 3.87 percent, which was well above either index.
Eight of the 2011 dogs are still dogs in 2012. The 2012 dogs are AT&T (NYSE:T), DuPont (NYSE:DD), General Electric (NYSE:GE), Intel (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), Kraft (KFT), Merck (NYSE:MRK), Pfizer (NYSE:PFE), Procter & Gamble (NYSE:PG) and Verizon (NYSE:VZ). The two new dogs are GE and PG. These 2012 dogs are a more varied group of equities than the 2011 group. The 2011 list lacked any financial sector exposure, which then turned out to be a good thing, but GE brought with it some significant financial exposure.
Like the broader market, most of the 2012 Dogs performed exceedingly well during the fourth quarter of 2011 and at the very start of 2012. Since then, some of the dogs have cooled off. Below are recent performance rates for the 2012 dogs, including their 2012-to-date performance, as well as their current yields.Click to enlarge
So far within 2012, DuPont and Intel are by far the best performing 2012 Dogs. Both also appreciated slightly over 37 percent from their respective 52-week lows. DuPont was the worst performing 2011 Dog. Through January, the 2012 dogs are underperforming both the DJIA and S&P 500.
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. Eight of the ten dogs are down less than ten percent from their 52-week highs, with five down less than five percent. With so many equities approaching their recent highs, any market instability could negatively impact these equities.
On an individual equity level, several of these high-yielding large caps could become darlings of the market as investors continue to seek out income supplements due to a lack of substantial yield from U.S. Treasuries and high-quality corporate bonds. The 2012 dogs now have an average yield of 3.96 percent, which is nearly double the yield of the S&P 500 and over double the yield of a 10-year Treasury.
2011 was a very volatile year that ended in an upswing, and it appears likely that 2012 could be similarly volatile, with issues such as European sovereign failures, Middle Eastern revolts, U.S. fiscal policy and potential Asian cooling all still overhanging.
Disclosure: I am long GE, INTC, KFT.
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.