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The Dogs of the Dow theory postulates that investing in the 10 Dow Jones Industrial Average components that enter a calendar year with the highest yields is a prudent investing approach. The strategy presumes the Dogs are lagging and that they could provide both capital appreciation and an above-average income stream.

Dog theorists note that no matter what changes happen to the Dogs of the Dow from year to year, the components should all be relatively strong, liquid and familiar companies due to their inclusion in the Dow. In 2011, all of the Dogs started off with a yield of at least three percent and nine of the ten Dogs appreciated over the course of the year. As a group, the 2011 Dogs gained 12.08 percent, versus a 5.37 percent gain by the broader Dow and an essentially flat performance by the S&P 500, while yielding about double the S&P 500. So far in 2012, the benchmarks have performed rather well, with the Dow up 11.2 percent and the S&P 500 up 15.7 percent. Through three quarters, the performance of the 2012 Dogs is roughly in line with the broader Dow.

The 2012 dogs are very similar to the 2011 list, with the only changes being the addition of General Electric (NYSE:GE) and Procter & Gamble (NYSE:PG), replacing McDonald's (NYSE:MCD) and Chevron (NYSE:CVX). McDonald's was the best performing Dow dog in 2011, appreciating 30.71 percent. Though General Electric was not a dog in 2011, it entered 2012 with the fourth-highest dividend within the DJIA, having grown its quarterly dividend by 70 percent in the prior two years. Through the first three quarters of 2012, GE is the best performing Dog, having appreciated by about 28.3 percent, and its yield is now the thirteenth highest in the Dow.

By virtue of its above-mentioned performance, unless GE announces another dividend increase, it appears the company will not be a 2013 Dog. Kraft (KFT), by virtue of its pending splitting into two companies, is no longer a member of the Dow and cannot be a 2013 Dog. McDonald's, which was the best performing 2011 Dog, appears poised to be a 2013 Dog due to its underperformance in 2012, having declined by about 7.2 percent, and a recent 10% dividend increase, from $0.70 to $0.77 per quarter, and now yields abut 3.35 percent.

Similarly, Chevron increased its dividend in 2012 by about 11 percent, from $0.81 to $0.90 per quarter. These dividend increases make it possible that the two Dogs that left the list last year will rejoin the group in 2013. While McDonald's appears highly likely to be a 2013 Dog, barring any substantial changes in share price, Chevron should have greater competition due to its lesser yield, now at about 3.05 percent.

Competition will include Microsoft (NASDAQ:MSFT), which announced a 15 percent dividend increase two weeks ago, from $0.20 to $0.23 per quarter. This increase made MSFT's yield a competitive 3.1 percent. Another tech contender is Hewlett-Packard (NYSE:HPQ), which raised its dividend in the first half of 2012 and which lost one-third of its value through the first three quarters of 2012. HPQ's dividend increase and equity losses have combined to result in a yield above 3 percent. Cisco Systems (NASDAQ:CSCO) could also be competitive after it raised its dividend last quarter by 75%, from $0.08 to $0.14 per quarter and now yields about 2.95 percent.

Additional dividend increases may occur, as may some stock corrections. For example, GE has appreciated by over 28% over the last three quarters and may give back some of those gains in the fourth quarter, raising its current yield of about 3% to something more competitive. GE might also increase its payout, which it has not done in four quarters.

Currently the most probable new addition appears to be MCD, though it is entirely possible that two or more changes will occur. Much of the final 2013 list making will certainly depend upon Q4 market activity, upcoming dividend declarations and other corporate matters released between now and the end of the year. One certainty is that because KFT is no longer in the Dow, there must be at least one change to the Dogs in 2013.

Source: What Companies Will Be The New Dow Dogs In 2013?