Dogs of the Dow: All Bark and No Bite in 2012

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With investors looking for income anywhere they can find it, the stocks in the Dow Jones Industrial Average (DJINDICES: ^DJI  ) are a good starting point for investing ideas. With all 30 Dow components paying at least a minimal payout, there are a variety of dividend-investing strategies you can use to tap into the Dow's dividend potential.

One such strategy is known as the Dogs of the Dow, which involves picking the 10 top-yielding stocks in the Dow at the beginning of the year and holding them all year long. Although the Dow Dogs strategy has often outperformed the Dow's overall return over the years, 2012 didn't give Dogs investors the edge they would have liked.

What happened?
The big problem with the Dogs in 2012 is that they didn't include the top gainers in the Dow. Financial stocks posted an especially strong showing in 2012, with Bank of America (NYSE: BAC  ) more than doubling over the course of the year. But because B of A and other banks have kept dividends at low levels -- in some cases because of the Fed's regulatory requirements -- none of them made the Dogs list for this year. Similarly, home-improvement retailer Home Depot (NYSE: HD  ) posted gains of 45% on the back of a stronger housing market, but its 2.8% yield at the beginning of 2012 wasn't enough to get it into the top 10.

Conversely, the Dogs did include the second-worst performer in the Dow, Intel (NASDAQ: INTC  ) , with its roughly 15% price decline so far in 2012. To be fair, most of the Dogs posted small gains, but even with Pfizer (NYSE: PFE  ) topping the list with a 16% rise as it managed to overcome patent-cliff concerns to post good gains, it wasn't enough to put the Dogs ahead of the overall Dow. Even incorporating the higher dividends that the Dogs paid, they still weren't quite able to catch up -- although they came close.

What's in store for 2013?
Many of 2012's Dow Dogs will be back for a repeat performance in 2013, but you'll also see some new faces. Come back next weekend when I take a look at the Dogs of the Dow for 2013.

Bank of America has the lowest yield in the Dow, but that could change soon. With the bank finally getting its balance sheet in order, B of A may get a chance to increase its dividend in the near future. Does that mean that B of A is a smart stock to buy right now? Get the latest from our research report on the bank, which details Bank of America's prospects and includes three reasons to buy and three reasons to sell. Just click here to get access.

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