The Dogs of the Dow were up about 11 percent, but the full Dow posted a 20 percent bump for 2009.
The Dogs of the Dow is an automatic stock-picking tool that had a remarkable run of winning strategies before falling behind - this is the third straight year Dogs failed to beat the full Dow.
The theory behind Dogs of the Dow is that you invest in the 10 highest dividend-yielding stocks at the beginning of the year.
After one year, you sell those stocks and buy the next group of 10 highest dividend yielding Dow stocks.
The Dow or Dow Jones Industrial Average is made up of the top 30 companies.
The dividend yield is calculated by dividing the cost per share into the annual dividend.
If the stock's price has been beaten down, the dividend yield will be high since the dividend is fixed while stock prices change.
These beaten down stocks have the best chance for scoring well in any recovering economy.
That has proved the case for many more years than the strategy has been wrong (such as the past three years).
This year, like the previous two, the Dogs of the Dow failed to live up to their potential.
The investment process is straight forward. Pick the top 10 highest dividend yielding stocks and buy them at the beginning the year.
Wait a full calendar year (to avoid tax problems) and sell the stocks.
Waiting a full calendar year makes it possible to have any gains taxed under long-term capital gains, which is usually much cheaper that short-term gains or ordinary tax.
2009 Dogs of the Dow:
- Bank of America
- General Electric
- Pfizer
- DuPont
- Alcoa
- AT&T
- Verizon
- Merck
- JP Morgan Chase
- Kraft
2010 Dogs of the Dow:
- Pfizer
- DuPont
- AT&T
- Verizon
- Merck
- Kraft Food
- Home Depot
- Intel
- Chevron
- McDonald's
You will notice some repeats in 2010 from the 2009 list.
Had the Dogs of the Dow strategy worked, the 2009 stocks would have outperformed the Dow.
A new list for 2010 would represent those stocks beaten down (or under-performing) in 2009.
A Strategy for You?
The Dogs of the Dow has been a winner much more often than it has lost (underperformed the Dow).
It is simple to implement and, if you hold the stocks for a full calendar year, you qualify for long-term capital gains, which are usually much lower than ordinary income tax rates.
The 2010 list looks like it may have a good chance to get back on the winning track, but much can happen in the next year.
