Will These Stocks Be the Dow's 2013 Dividend Winners?

If you like to keep your investing simple, strategies that are easy to understand and set up can look awfully attractive. With so many investors focusing on stocks that can produce ample, stable, and reliable dividend income as well as potential for growth, one strategy you should know about is the Dogs of the Dow, which kicked off its latest installment this past week.

The big question about any strategy, though, is whether it will produce winning stocks. I'll give you some answers later in this article, but first, let's meet this year's Dogs of the Dow and explain the strategy further.

What are the Dogs of the Dow?
You can explain the Dogs of the Dow strategy in just a few simple sentences. Start with the 30 stocks of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , and then rank them by their dividend yield on the last day of the year. The top 10 on the list qualify as the Dogs of the Dow for that year, and to use the strategy, you buy equal dollar amounts of all 10 stocks. Hold them until the end of the year, and then if you want to keep using the strategy, check to see what changes there are to the list and then buy and sell stocks accordingly.

The nice thing about the Dogs strategy is that it emphasizes two important characteristics of stocks: dividend yield and value. Yield is obvious, but the reason value gets considered is that for the most part, dividend yields track with stock valuations, so that when a stock gets cheap, its dividend yield usually goes up.

A look at the 2013 Dogs
Here's the list of Dow Dogs for 2013:

Stock

Dividend Yield as of Dec. 31, 2012

AT&T (NYSE: T  )

5.3%

Verizon (NYSE: VZ  )

4.8%

Intel (NASDAQ: INTC  )

4.4%

Merck (NYSE: MRK  )

4.2%

Pfizer (NYSE: PFE  )

3.8%

DuPont (NYSE: DD  )

3.8%

Hewlett-Packard (NYSE: HPQ  )

3.7%

General Electric (NYSE: GE  )

3.6%

McDonald's (NYSE: MCD  )

3.5%

Johnson & Johnson (NYSE: JNJ  )

3.5%

Source: DogsoftheDow.com

You can see the value bent of the Dow Dogs from the list's 2013 additions, Hewlett-Packard and McDonald's. McDonald's entered the group after suffering a 12% drop in 2012, as the company suffered its first monthly same-store sales drop in nine years amid the headwinds of slow overseas economic growth and the ongoing challenge of high food commodity prices. Meanwhile, Hewlett-Packard was in the bottom 10 stocks of the Dow by yield at the end of 2011, but a 44% plunge because of a number of missteps sent the yield skyrocketing.

Will the Dogs beat the Dow in 2013?
As simple as the Dogs of the Dow strategy is, it's not guaranteed to produce better results. Last year, the average share-price increase for the Dogs was 5.7%, quite a bit less than the 11% average across all 30 stocks. The Dogs also underperformed the Dow's actual performance of 7.3%, based on the average's price-weighting rather than the equal-weighting strategy the Dogs use.

Looking forward, the strategy's success is likely to hinge on whether the telecom and pharmaceutical contingent can lead the way with strong gains. Despite some of the best returns among the Dogs in 2012, the four stocks in those sectors weren't able to produce enough gains to lift the Dogs to victory. But if General Electric keeps recovering with its new emphasis on its core industrial businesses, and if Pfizer can keep defying low expectations as some of its biggest drugs go off-patent, then that could set the stage for a Dow Dogs win in 2013.

Take the Dogs for a spin
If sophisticated, hard-to-understand strategies are keeping you from putting money to work in the stock market, a simple approach like the Dogs of the Dow could be the best answer. It won't always beat the market, but the strategy will keep you invested in some of the best-known blue-chip stocks in the world.

The Dogs of the Dow are often winners, but they aren't the only way to make money investing. If what you want are smart ideas with huge potential, you should learn more about Motley Fool co-founder David Gardner, whose picks have frequently trounced the market. His never-ending search for revolutionary stocks has led to some savvy recommendations before Wall Street catches on to their disruptive potential. If you're interested in how David discovers his winners, click here to get instant access to a personal tour behind David's Supernova service.


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