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In investing, simplicity is bliss. Dividend investors love the Dogs of the Dow strategy because it's so simple to use.
The Dogs of the Dow also have a reasonably good track record. As we saw last week, the Dogs have been able to beat the performance of the Dow Jones Industrial Average (INDEX: ^DJI ) . But which Dow stocks are in the running to become next year's Dogs, and what do their prospects look like? I'll take a closer look at prospective Dog stocks in a moment, but first, let's do a quick review of the Dogs of the Dow strategy.
Get your high yields here
With investors hungrier than ever for dividend stocks, strategies that focus on maximizing income have become extremely popular. But with many high-yielding dividend stocks introducing substantial risks to investors' portfolios, many people prefer to limit their search to the highest-quality companies they can find. The 30 stocks in the Dow Industrials are certainly good candidates to choose from, with each company being a leader in its respective industry, and that's a big part of the draw of the Dogs of the Dow.
To summarize, picking the Dogs of the Dow is as simple as ranking the Dow 30 by dividend yield and taking the first 10. Let's look at the companies that are in the running to make the list for 2013.
Coming down the homestretch
At the very top of the list, it appears that the top two Dogs pretty much have the race sewn up, although which of the two will top the other is still uncertain. Both AT&T (NYSE: T ) and Verizon are long-term denizens of the Dog list, and with dividend yields a full half percentage point higher than their nearest competitors, it'd take a major move to dislodge them from their positions.
What keeps the telecom giants near the top of the Dow Dogs each year is that both have business models that produce huge amounts of cash flow. Although it's extremely expensive to build and maintain their mobile networks, they nevertheless can pass through a large amount of that cash flow back to shareholders in the form of dividends. Even with solid advances so far this year, both stocks yield more than 4.5%.
Coming in at No. 3, though, is a stock that has vaulted up the Dog list for all the wrong reasons. Intel (Nasdaq: INTC ) sports a yield of nearly 4%, in large part because it's the only 2012 Dog list member that has posted a negative return so far this year. Until the chipmaker manages to jockey for position and enter the mobile market more forcefully, Intel will face skeptical shareholders who remain unconvinced that the tech giant can evolve past its historical dominance of the PC market to broaden its reach.
You can also expect some changes. McDonald's (NYSE: MCD ) appears likely to join the list based on its current yield, which has jumped by more than half a percentage point so far this year. The fast-food king has also put up lackluster share performance after years of market-beating returns, but the company's dividend growth has continued unabated, with the announcement of another 10% boost in its dividend to take effect in December, after a 15% increase last year.
Conversely, General Electric (NYSE: GE ) appears poised to leave the Dogs list. With the stock having risen more than 25% so far this year, GE's dividend yield has plunged by nearly a full percentage point, closing below the 3% level recently. But stay tuned, because the conglomerate often announces a dividend increase during the fourth quarter. If GE announces a raise similar to its 13% boost last year, that might be enough to keep it among the Dogs.
The Dog days are just beginning
Anything can happen in the next quarter, so the Dogs haven't finished their 2012 race yet. You can track the progress of two contenders, Intel and GE, by looking at The Motley Fool's latest premium reports on each. With ongoing updates, you won't get left out in the yard all night. Click here to read more about Intel, or to read our report on General Electric, click here.