Dividend Ideas: 2011 Dogs of the Dow

Dogs of the Dow has been a popular investing strategy for the better part of two decades now, and for good reason -- with a few notable exceptions, sticking to this approach has yielded impressive gains for its proponents.

The way it works is simple: At the start of the year, buy the 10 stocks from the Dow Jones Index with the highest dividend yield, then reevaluate 12 months later, selling the ones whose dividend yields have dropped.

Here's why it works: The 30 stocks on the DJI are considered to be strong, quality companies with regular, repeating business cycles -- meaning that highs follow lows and lows follow highs, ad infinitum. If one of these Dow stocks is seeing a high dividend yield, it means that its dividend per share, a measure of the company's average worth, is relatively high compared with its stock price.

This suggests that the stock is oversold and undervalued -- after all, if management is willing to keep up with its high dividend payments, it's a testament to their belief in the company's prospects.

According to the Dogs of the Dow strategy, investors get a bargain by buying the stock at its low point -- when the company's share price eventually cycles back around, as the theory assumes it will, investors will realize significant gains.

Though it seemed for a couple of years that the Dog days were over, in 2010 they fetched solid returns for their owners, beating the Dow for the first time since 2006. Of course, past performance is no guarantee of future results -- use the list below as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

Here's the list of 2011 Dogs of the Dow -- will you be adding any of these names to your portfolio?

Company

Dividend Yield

Performance Over Last Year

AT&T (NYSE: T  )

5.84%

9.39%

Verizon Communications (NYSE: VZ  )

5.72%

7.64%

Merck & Co. (NYSE: MRK  )

4.21%

1.60%

Pfizer (NYSE: PFE  )

4.19%

-3.10%

Kraft Foods (NYSE: KFT  )

3.76%

19.88%

Johnson & Johnson (NYSE: JNJ  )

3.49%

-1.25%

EI DuPont de Nemours & Co. (NYSE: DD  )

3.38%

57.10%

Intel (Nasdaq: INTC  )

3.35%

11.40%

Chevron (NYSE: CVX  )

3.26%

17.89%

McDonald's (NYSE: MCD  )

3.16%

29.14%

Interactive Chart: Press Play to compare analyst ratings for the top 9 stocks mentioned above.


 

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

Intel and Pfizer are Motley Fool Inside Value recommendations. Chevron and Johnson & Johnson are Motley Fool Income Investor recommendations. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson. 

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