Dogs of the CAPS

At the risk of sounding like an old Meatloaf song, it seems three out of four ain't bad.

I've been tracking for the past six years how the popular "Dogs of the Dow" strategy would work if I superimposed a screen using Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars.

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 its own twist on the game by ranking those high-yielding stocks by price -- lowest to highest -- and buying just four of the top five (if the cheapest stock is also the highest yielder, throw it out, because it's probably a real dog). While the Fool abandoned its Foolish Four strategy because of doubts about the efficacy of the whole mechanical investing strategy, some sites still track results, and over 35 years the "Dogs of the Dow" approach has a pretty impressive record, with annualized gains of around 18%.

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 CAPS investors might be an interesting addition to the strategy. 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? Once again CAPS Dogs have handily outpaced the returns of almost everyone else. Only the S&P 500 eked out a better performance and did so on the very last trading day of the year, scoring a 1.7% gain on Dec. 31 to push it ahead of our strategy. Over the entire six-year period we've been tracking performance, though, our CAPS Dogs remain the clear winners.

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 three years, the Foolish Four and our CAPS Dogs have matched returns because all the stocks were highly rated and so none were excluded, but that won't be the case in 2013.

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

+Qualifies for Foolish Four

Our CAPS Dogs will be GE, Pfizer, Intel, and AT&T -- the same as last year -- and will no longer mirror the Foolish Four because HP, while the lowest priced stock isn't the highest yielder, so it makes it into the portfolio, but due to its low two-star CAPS rating, doesn't make the cut for our CAPS Dogs. So we drop down to the next stock which is Ma Bell.

What's it all about, Wolfie?
In the past I've noted that while I've got a soft spot for these strategies I don't follow them anymore. Well, last year I decided to put my money where my mouth was and buy the CAPS Dogs myself; though, due to Foolish trading rules, I wasn't able to buy into the stocks until several trading days had passed.

I also made one more change in that I thought I'd try investing in only the top-rated CAPS Dogs, which had me betting on GE, Pfizer, and Intel, but not AT&T. Considering the chipmaker's dismal performance in 2012 (well, it had made a good run for it early on) that ended up weighing on my performance. Those three stocks only averaged a 10% increase -- not shabby, but not a world-beater, either.