The 2012 Dogs Of The Dow Continue To Underperform The Broader Market

 |  Includes: DD, GE, INTC, JNJ, MDLZ, MRK, PFE, PG, T, VZ
by: Zvi Bar

The Dogs of the Dow theory is an investing strategy that is based upon investing in the ten highest-yielding Dow Industrial components, usually as calculated at the start of each year. This strategy is premised on the idea that the higher yielding components are lagging the broader market, that they should catch up and provide capital appreciation, and that they will also provide an above-average income stream due to their higher yields. Various modifications to the Dogs of the Dow strategy do exist

Because all Dow Dogs are DJIA components, the investments will all be large and liquid equities that are well-known by most investing Americans. The strategy is not designed for trading, but rather, for holding onto the positions for the year and possibly quite longer. Most dogs from one year stay dogs during the following year. For example, eight of the 2011 dogs remained 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 dogs added this year are GE and PG. Below are the 1-week, 1-month and 2012-to-date performance rates for these 2012 Dogs, as well as their present yields.Click to enlarge

In 2011, the Dogs of the Dow outperformed the broader market, as defined by the DJIA and the S&P 500. The 2011 dogs combined 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, while offering about double the yield.

So far in 2012, though, the dogs are averaging 2.84 percent appreciation, while the Dow 30 are up on average 6.32 percent and the S&P 500 is up 9.41 percent. Further, the 2011 dogs provided an average yield of 3.87 percent. In essence, at least so far in 2012, the Dogs of the Dow are underperforming the benchmarks. Currently, the 2012 dogs have an average yield of nearly four percent.

These 2012 dogs are slightly more varied than the 2011 group of equities. The 2011 list lacked financial sector exposure, but that turned out to be a good thing, since financials dramatically underperformed the market in 2011. In 2012, the addition of GE brings with it financial exposure.

Nonetheless, both the S&P 500 and the DJIA are both more heavy in financials, a sector that has been outperforming the broader market so far in 2012. So far, DuPont and Intel are the best-performing 2012 Dogs, both up over 12 percent. DuPont was also the worst performing 2011 Dog, and may finally be catching up.

One point of concern about the dogs, as well as many other investments and the broader market, is that many major equities are at or near 52-week highs. As a result, it is possible that a correction could come to the broader market and/or some of these larger equities.

Disclosure: I am long (GE), (INTC), (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.