Dogs of the CAPS

I like dogs. They're loyal and friendly. And when it comes to investing, they can indeed be your best friend.

Most investors have probably heard of the Dogs of the Dow strategy. Rank the dividend-yielding stocks from highest to lowest yield and buy the top 10. Hold for one year and a day and sell. Then do it all over again. Wash. Rinse. Repeat.

Ye Olde Foolish Four
The Motley Fool even used to follow a strategy called the Foolish Four which built upon the original strategy by ranking those high-yielders by price -- lowest to highest -- and buying just four of the top five stocks (the cheapest stock is also the highest yielder; throw it out because it's probably a real dog). While the Fool abandoned the strategy because of doubts about its efficacy, some sites still track results, and over 25 years it still has a pretty impressive record with annualized gains ranging from 17% to 20% or so.

Like I said, I like dogs. The Foolish Four was my first foray into investing in individual stocks, so I've always carried a warm spot for it in my heart. With the Fool's own foray into its newest investor intelligence ratings, I thought maybe Motley Fool CAPS might be an interesting addition to the strategy. More than 22,000 professional and novice analysts have rated more than 3,800 stocks, with the ratings of the most successful overweighted to come up with a CAPS rating. If even the smartest investors in Fooldom are rejecting these stocks, might they not hold some promise for real surprises for us?

So here are the top five highest-yielding, lowest-price stocks as of Jan. 1, 2007:

Not surprisingly, if you had run a screen to calculate the current list of Dogs of the Dow stocks, you'd come up with the same five companies though their yields and prices would be different today.

What you'd also notice is that Pfizer was not only the highest-yielding stock of the bunch, but also the lowest priced (but it was not the lowest rated dog). So if we followed the Foolish Four theory, we'd be tossing out the pharmaceutical giant and investing in the next four stocks: GM, AT&T, GE, and Verizon.

Putting on the CAPS
So how have our dogs done so far? It's only been a little over a month, so this is a study in progress. But here are their returns to date:

In comparison, the S&P 500 has returned just 1.6% since the beginning of the year. Now a month or so is not enough time to compare returns, but it's certainly off to a good start.

What's it all about, Wolfie?
I'd be remiss if I didn't mention that I no longer invest using mechanical investing strategies like the Dogs of the Dow or the Foolish Four, but I do keep an eye on how they perform if for no other reason than a nostalgic remembrance of how I started.

As smart as our Foolish investors are, this is a contrarian investing strategy that tries to stand market wisdom on its head. I'll keep you posted on how our Dogs are running this race.

Want to check out the rest of the CAPS universe? Just click here to get started. It's 100% free.

Pfizer is a recommendation of Motley Fool Inside Value service. AT&T is a former Stock Advisor selection.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.