These Dow Stocks Are No Dogs

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Everyone likes a simple investing strategy. When it comes to dividend investing, it doesn't get much simpler than the Dogs of the Dow.

So far this year, the Dogs of the Dow have been able to beat the performance of the Dow Jones Industrial Average (INDEX: ^DJI  ) . But what's behind that outperformance, and what do current conditions among high-yielding Dow stocks say about the strategy for next year? I'll answer those questions later in this article, but first, let's take a quick look at the Dogs of the Dow strategy and how it got so popular.

Hot dog
During big bull markets, most investors gravitate to growth stocks. But over the past several years, as the financial crisis brought about one of the worst bear markets in recent memory, investors have increasingly turned to stocks that pay healthy dividends as a safety play. You can't always count on dividend stocks to hold up during bad times, but historically, they've provided at least some ballast against big downward moves.

The Dogs of the Dow are all about dividend stocks. To use the strategy, take the Dow's 30 components and rank them by dividend yield. Look at the first 10 on the list, and invest equal amounts in each stock. That's it -- you're done.

Last year, the Dogs of the Dow crushed the overall average. This year, it's a much closer race.

It's a dog-eat-dog world
Fortunately, both the Dow Dogs and the overall Dow average are both posting strong gains this year. For the Dow, investors have enjoyed an 11% return, not including dividends at an annual yield of between 2.5% and 3%. The Dogs of the Dow, on the other hand, have returned almost 13% excluding dividends, and the payouts that investors have earned on those high-yielding stocks are higher than the overall Dow, at about 3.6% currently.

Two percentage points may not seem like much, and compared with some past years of outperformance for the Dogs of the Dow, it's not. But every percentage point counts, and over time, a couple percent can mean the difference between a secure retirement versus running out of money early.

Interestingly, though, all five of the top-performing Dogs of the Dow stocks came from the five highest-yielding stocks at the beginning of the year. AT&T (NYSE: T  ) leads the way with a nearly 26% gain, as continued strength in its smartphone offerings has given it impressive results. The release of the new iPhone may not be as lucrative for AT&T as analysts hope it someday will be, once AT&T manages to detach itself from the huge subsidies it pays smartphone makers to lure customers to its calling and data plans. But overall, the company has done a good job of upgrading its network and taking advantage of the mobile revolution.

General Electric (NYSE: GE  ) is the other big winner. In a sluggish global economy, you'd expect the massive conglomerate to fare poorly. But after getting punished so hard during the financial crisis, the recovery of GE's financial division has been especially impressive. Moreover, its core industrial businesses are starting to fire on all cylinders, helping to pull the overall company back in the right direction.

This dog's holding back the pack
In the bottom half of the Dow Dogs, the story isn't as pretty. Intel (Nasdaq: INTC  ) is the only Dow Dog to post a loss so far for the year, as concerns arise about the company's slow pace in building itself as a serious player in the mobile-chip industry. Despite a still-lucrative business in PC-related processors, Intel can't rely forever on a PC industry that shows signs of cracking.

Johnson & Johnson and Procter & Gamble (NYSE: PG  ) have both managed to post gains, but only in the mid-single-digit percentage range. J&J in particular has had to deal with a host of recalls, legal controversies, and manufacturing problems in recent years, and it recently got a vote of no confidence from superinvestor Warren Buffett, who cut his position in the stock. P&G, on the other hand, has faced both currency headwinds and higher input costs that have squeezed margins and forced it to make difficult choices on pricing.

Run with the Dogs
The Dogs of the Dow strategy doesn't always work, but its simple approach in pointing you toward top-yielding blue-chips makes a lot of intuitive sense. To learn more about the current crop of Dow Dogs, consider accepting this invitation to look at The Motley Fool's latest premium reports. Click here to read more about Intel, or to read our report on General Electric, click here. You'll be glad you did.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter, @DanCaplinger. The Motley Fool owns shares of Intel and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Procter & Gamble, and Intel, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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