Performance Review: 2012 Dogs Of The Dow

by: Zvi Bar

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 (NYSE:T), DuPont (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) are a more varied group of equities than the 2011 group. The last group was noticeably absent any equity from the financial sector, but GE brings significant financial exposure, along with several other industries that were unrepresented last year.

Historically, financials were regularly members of the dogs, but most had to reduce their dividends in 2008 and 2009, taking them out of dog range. General Electric is the first to make it back in after raising its dividend by about 70 percent over the last year. Nonetheless, the conglomerate reported some weaker than expected quarterly numbers last week, raising questions as to whether another dividend increase is forthcoming.

Like the broader market, many of the 2012 Dogs performed exceedingly going into and into the start of 2012. 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. So far within 2012, though, the dogs are slightly underperforming the both benchmarks.

So far within 2012, DuPont, GE and Intel are by far the best performing 2012 Dogs and the only members to be outperforming the benchmarks. DuPont was the worst performing 2011 Dog, by far, and is set to report its Q4 2011 earnings on Tuesday, January 24. Some considerable price moves are possible within the next two weeks, as the majority of dogs as well as the broader Dow and S&P 500 members are still yet to report their Q4 2011 earnings.

Several of the 2012 dogs will report their Q4 2011 earnings this week. In addition to Dupont, both Verizon and Johnson & Johnson will report on Tuesday, January 24, while AT&T will report on Thursday, January 26. Procter & Gamble is set to report on Friday, January 27.

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 that ended up an upswing, and it appears likely that 2012 will be similarly volatile, with issues such as European sovereign failures, Middle-Eastern revolts, U.S. fiscal policy and potential Asian cooling all potentially swaying the broader market.

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.