Dogs of the CAPS

For the past five years I've been tracking how using a CAPS strategy on top of a Foolish twist to a popular Dow gambit would pan out.

Most investors have probably heard of the Dogs of the Dow strategy. Rank the dividend-yielding stocks of the Dow Jones Industrial Average 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 put a twist on that 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 35 years the Dogs of the Dow has a pretty impressive record, with annualized gains of 17.7%.

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. But I thought adding the opinions of the best and brightest investors on Motley Fool CAPS might be an interesting addition to the strategy. More than 180,000 professional and novice analysts have rated more than 5,400 stocks, with the best of them earning five stars. Buying only those Foolish Four stocks that earned a three-star rating or better on CAPS might just give us outsized performance.

So how did our doggies do? Over the past five years, CAPS Dogs have handily outpaced the returns of any of the other strategies employed.

Strategy

2007

2008

2009

2010

2011

5-Year Avg.

CAPS Dogs 7.95% (22.09%) 11.56% 9.55% 15.19% 4.43%
Dogs of the Dow (1.40%) (41.30%) 12.90% 15.50% 12.28% (0.40%)
Foolish Four 3.60% (50.20%) 13.86% 9.55% 15.19% (1.60%)
Dow 30 6.80% (33.80%) 18.82% 11.02% 5.53% 1.67%
S&P 500 3.50% (38.50%) 23.45% 12.78% 0.00% 0.25%

Even during the depths of the Great Recession, when all the strategies lost money, our CAPS Dogs did better, losing less than any of them. Over the past two years, the Foolish Four and our CAPS Dogs have matched returns because all the stocks were highly rated and so none were excluded.

Which companies are the ones we'll be tracking in 2012? Here are the Dogs of the Dow for this year.

Company

CAPS Rating
(out of 5)

Yield

Price 12/31/2011

AT&T (NYSE: T  ) *** 5.82% $30.24+
Verizon (NYSE: VZ  ) **** 4.99% $40.12
Merck **** 4.46% $37.70
General Electric (NYSE: GE  ) **** 3.80% $17.91+
Pfizer (NYSE: PFE  ) **** 3.70% $21.64+
DuPont **** 3.58% $45.78
Johnson & Johnson ***** 3.48% $65.58
Intel (Nasdaq: INTC  ) ***** 3.46% $24.25+
Procter & Gamble ***** 3.15% $66.71
Kraft **** 3.10% $37.36

Qualifies for Foolish Four.

Our CAPS Dogs and the Foolish Four -- GE, Pfizer, Intel, and AT&T -- will mirror each other again this year as the CAPS community also finds these companies to be among the best. Perhaps it's not so surprising that in these troubled times investors will fly to the biggest, most stable companies.

What's it all about, Wolfie?
I'd be remiss, though, 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.

If you want to get your own dog in the race, check out the special new report from The Motley Fool in which our analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- get instant access now!

Fool contributor Rich Duprey owns shares of Intel, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson and Intel. The Fool has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Pfizer, Johnson & Johnson, and Procter & Gamble. Motley Fool newsletter services have recommended creating a bull call spread position in Intel. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2012, at 4:09 PM, etoast wrote:

    Rich, it would be great to see this strategy as a separate CAPS player.

  • Report this Comment On January 03, 2012, at 5:20 PM, TMFDitty wrote:

    Like.

  • Report this Comment On January 04, 2012, at 7:32 AM, TMFCop wrote:

    etoast,

    Great suggestion! I've requested an account be made to track this. Perhaps on CAPS I'll do a monthly update in the blog and track a new portfolio every month (says he, feeling awfully ambitious this morning).

    Thanks for reading,

    Rich

  • Report this Comment On January 05, 2012, at 1:02 AM, BBLBBD wrote:

    This appears similar to the old "Beating the Dow" method of the late 80's early 90's wherein you identify the highest yielding, lowest price stocks of the Dow as your portoflio. The other suggestion was to to identify the "Penultimate Profit Prospect" i..e the second lowest priced highet yielder and go for it.

    This suggest that the strategy no longer works in todays environment.

    What is the opinion ?

  • Report this Comment On January 05, 2012, at 8:24 AM, TMFCop wrote:

    BBLBBD,

    Heh! Robert Sheard's work was amongst my favorite (shhh! the PPP was actually my "real" entry into the Foolish Four and Beating the Dow investing!).

    FWIW, when I calculated the returns for this article I also did it for the PPP (and the old Unemotional Two as well) and both of those did even better than the CAPS Dogs here, with the PPP offering the best returns of all.

    Now it was highly volatile, and spectacular gains were sometimes followed by equally spectacular losses, but I've never completely agreed with the thought it's no longer a viable strategy. Maybe you can't teach an old Dog new tricks.

    Rich

  • Report this Comment On January 05, 2012, at 8:41 AM, TMFCop wrote:

    etoast,

    Just following up, there should be a TrackCAPSDogs screen name soon that I'll be using to, um, track these CAPS dogs.

    Rich

  • Report this Comment On January 05, 2012, at 9:05 AM, rd80 wrote:

    I'd be interested to see how some different twists might work. Maybe pick all the 4 and 5 star rated stocks from the Dow Dogs. Or, add any 5-stars from the Dow Dogs to the CAPS dogs.

    FWIW, I hope the CAPS dogs strategy really rocks - I own three of the four.

  • Report this Comment On January 08, 2012, at 3:58 PM, etoast wrote:

    Rich,

    I've added TrackCAPSDogs as a favorite player!

    Unfortunately, we overlooked the CAPS requirement for 7 active picks to receive a score or rating.

    Thanks for setting it up. I look forward to seeing the results.

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