The Dogs of the Dow has been billed as "a stock-picking strategy devoted to selecting the highest dividend-paying Dow stocks." The premise behind the strategy is that while the quality names that are typically included in the Dow Jones Industrial Average (^DJI -0.98%) rarely adjust their dividends based on market conditions, the prices of the stocks fluctuate with the market. The result is that those companies that have the highest dividend yields are "out of favor" within the index -- in other words, as their stocks prices fall, their dividends yields rise; the underperformers end up having the highest dividend yields based on the performance of the stocks.
If you buy the stocks that have been out of favor for the course of a given year, you expect those stocks to "recover" in the subsequent year. A back test of the strategy reveals that from "1957 to 2003, the Dogs outperformed the Dow by about 3%, averaging a return rate of 14.3% annually, whereas the Dows averaged 11%." Without totally buying into the strategy, the Dogs are a great place to find attractive stocks heading into each Jan. 1. The following three Dogs of the Dow are attractively positioned at current levels and are worth including in your portfolio.
AT&T (T -1.37%): Yielding roughly 5.3% as of last Friday's close, AT&T is the top yielding company in the Dow with a single trading day left in 2012. When this is coupled with a year-to-date performance for the stock of around 10%, the company looks attractive immediately; shares outpaced the broader index, which returned roughly 5% on the year. As Anders Bylund points out, the wireless industry is in a state of significant flux, but the company's "106 million wireless subscribers aren't going anywhere in a hurry, especially since AT&T remains a top provider of iPhone service."
He additionally notes that 2013 may finally be the year that wireless carriers push back against high smartphone subsidies that hurt their respective bottom lines, but drive sales for Apple (AAPL 0.52%) and others. It may be too early to know for sure on the subsidies, but a change in the business model would mean a boon for AT&T. As things stand, the company has been successful at growing its 4G LTE coverage which currently is available in 103 markets to 150 million people ; the company aims to reach 250 million users by the end of 2014. Overall, the company is very solidly positioned moving into 2013 and belongs in your portfolio.
Verizon Wireless (VZ -0.68%): In quite the Dog fight, Verizon is the second highest yielding Dow component with a dividend yield of 4.7%. The company also lagged AT&T in stock performance in 2012, up roughly 7% on a year-to-date basis with one day to go. Where the company significantly outpaces its biggest rival is in coverage breadth for 4G LTE; Verizon already cover 300 million Americans in 400 markets. With the release of the iPhone 5, which operates of the LTE network in the U.S., Verizon gains an important advantage that has not likely been fully reflected in its subscriber numbers.
While changes may be coming in the industry, Verizon's size and experience position it to succeed. Competition from AT&T, and even Sprint Nextel (S) – backed by a big pile of cash from Japanese Softbank – are likely to be fierce, but the company is ready for the fight. Given all of these factors, Verizon is a buy, even with AT&T also in your portfolio.
Intel (INTC 1.77%): Despite the reality that shares are down 16.5% this year, there is a general agreement that Intel represents a solid value. The company has diversified revenue streams expected from three critical market segments: PCs, mobile processors, and servers. Against the backdrop of stories heralding in the death of the PC, in 2012, PC processors are projected to amount to $31 billion in sales; this represents roughly five times the dollar value of the entire mobile processor market. PCs may be on the decline, but significant revenue still comes from that segment. In addition, Intel is expected to release its own 4G LTE chip in early 2013, and DigiTimes recently reported that the company is expected to roll out a new smartphone platform at the Mobile World Congress in February. Lastly, the server division of Intel -- a historically dominant business for the company -- is expected to grow next year. This market segment represents a $10 billion per year and growing, so it should not be overlooked. Ultimately, the fact that Intel has had such a challenging 2012 creates a very solid entry point heading into 2013. The stock belongs in every core portfolio and is a buy at current levels.
