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.

Four Dog Night
The Motley Fool even used to follow a strategy called the Foolish Four, which built on the original strategy by ranking those high-yielders by price -- lowest to highest -- and buying just four of the top five stocks (if 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 has a pretty impressive record, with annualized gains of 17.7%.

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 83,000 professional and novice analysts have rated more than 5,400 stocks, with the best stocks earning five stars.

Last year I postulated that using a CAPS strategy on top of the Foolish Four might hold some surprises for us, and last month I updated the year's returns and identified this year's dogs. We'll track these top 10 dogs to see how they're doing all year long. Here's the list of 2008's Dow dogs and their returns so far.

Before the Foolish Four strategy was abandoned, it had gone through several iterations, and we're going to modify it once more for our purposes here. Instead of "Foolish Four," we'll call it "FF CAPS Dogs," and these will be the top four stocks from the Dow dogs list that rate four or five stars at the start of the year, out of the five maximum. That means we'll be watching Altria, Verizon, AT&T, and General Electric.

It looks like our FF CAPS Dogs are just slightly lagging the markets so far this year, primarily because telecom giants Verizon and AT&T are taking significant hits, although one month is too short a time to judge results. In fact, much of the telecom industry has been trading lower, particularly as the service sector -- which accounts for two-thirds of the U.S. economy -- recently reported its first contraction in five years.

I hear ya!
Top-rated CAPS All-Star DerektheDude, with a 99.11 player rating, seems to have tuned into the Dogs of the Dow formula last fall when he identified Verizon as a member. But his own experience with the company, along with its financial stability, led him to pick the telecom to outperform.

Verizon is a Dogs of the Dow pick for me ... I have been a Verizon customer ... and highly value them as my cell phone provider ... Verizon has towers EVERYWHERE, and I don't plan on moving overseas anytime soon. On top of that, they're in a stable financial situation which will encourage further growth and competition with the other big wireless providers ... Good dividends and a heavy hitter in the industry = a winner to me.

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, just for nostalgia. 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 FF CAPS Dogs are running.

If you want to get your own CAPS dog in the race, just click here to get started. It's 100% free.