Dogs of the Dow Beat the Broader Benchmarks and Deliver Twice the Yield

by: Zvi Bar

In this volatile market, investors are craving conservative yet higher yielding investments. Unfortunately, the interest rate banks now offer for cash and CDs is nearly zero. Additionally, short- and intermediate-term U.S. Treasuries aren’t much better. Worse yet, U.S. debt is facing more downgrade fear. As a result, many investors are avoiding the bond markets and potential depreciation there, and instead looking for stable large-cap equities that can fill the fixed income portion of their portfolio.

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 (this year, CVX, DD, INTC, JNJ, KFT, MCD, MRK, PFE, T, VZ). The theorists note that these components should all be relatively strong companies, and that their high yields indicate that they could possibly appreciate to a higher price and also pay out the above-average dividend.

Below, I have listed the 2011-to-date performance of each of the 10 Dogs of the Dow along with their current yields. I have also included the same information for the broader market as expressed by the total Dow (NYSEARCA:DIA) and also the S&P 500 (NYSEARCA:SPY):

As the data show, the Dogs of the Dow have thus far outperformed the broader benchmarks. Only three of the ten Dogs underperformed the DIA (or 70% beat), and only one of them underperformed the SPY (or 90% beat). In aggregate, the Dogs’ shares are up within 2011 just under one percent, as of Thursday’s close. This compares with losses of about 3.8% in the DIA and 6.7% in the SPY. Additionally, these performance numbers do not include dividends and the average yield for the Dogs is now 4.19%, over double the S&P 500 yield.

In a flight to safety, the Dogs of the Dow are often likely to outperform the broader market. These companies are generally large, relatively safe, and likely to be reasonably fairly valued, or at least not terribly overvalued. These companies probably exhibit many of the characteristics you have heard experts and advisors stress as the investments to make right now. Additionally, none of the names is among the financials, which appear to house some of the greatest present collateral risks.

Another great thing about the Dogs of Dow theory is that the companies are usually familiar to American consumers, and individuals should find it easy to obtain news and information on them. Further, the companies are highly liquid, and investors probably do not have to fear being unable to sell their shares to a reasonably large market.

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.

Disclosure: I am long INTC, KFT.