This Simple Strategy Is Crushing the Dow This Year

The "Dogs of the Dow" is the name of one of the simplest dividend strategies for beating the market. Over the coming year, I'll track the Dogs' performance and keep you abreast of news affecting these companies.

The strategy
The Dogs is an investing strategy that buys and holds equal dollar amounts of the 10 best-yielding dividend stocks of the Dow Jones Industrial Average (INDEX: ^DJI). The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycle and should do much better going forward. Investors in the strategy then would get not only large dividends but also gains in the stocks underlying those dividends.

High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts for various reasons:

• Many people fear that increasing dividend yields mean lower portfolio returns.
• Others believe that dividend payments mean that management believes the business is done growing.

Evidence compiled by Tweedy, Browne refutes these falsehoods. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by noted finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with $130,768 if the same money was invested in the index.

Performance
After beating the Dow by 6.8% in 2011, the Dogs underperformed the Dow by 0.2% in 2012.

Check out the Dogs' performance in 2013 so far:

Source: S&P Capital IQ as of April 20.

This week, the Dow Jones Industrial Average was down 2.14%. The Dogs fell less than the Dow, bringing the Dogs' outperformance up to 6.78 percentage points better than the Dow.

The big news affecting the Dow this week a slowdown in growth in China as well as multiple companies' earnings reports. On Monday, China reported GDP growth of just 7.7%, down from last quarter's 7.9% growth and below economists' expectations of 8% growth. The report led to a broad sell-off in commodities and cyclical stocks. The other story was that 11 of the 30 Dow stocks reported earnings this week, and across the board they were largely disappointing.

Movers and shakers
The biggest mover up this past week among the Dogs was Intel, which rose 3.51%. The stock was up for the week despite reporting worse-than-expected earnings on Wednesday. Intel reported earnings per share of $0.40, below analyst expectations of $0.41, and revenue of $12.58 billion, below expectations of $12.61 billion. While the company's PC processors division reported disappointing sales, the server division boosted revenue by 7.5%, which more than made up for the loss. Fool analyst Doug Ehrman took a close look at Intel's first quarter and what the future holds for the company. Click here for his take.

The biggest mover down this past week among the Dogs was General Electric, which fell 7.29%. The stock plunged on Friday, after the company reported earnings. GE reported earnings per share of $0.35, in line with analyst expectations, and revenue of $35 billion, above analyst expectations of $34.5 billion. Despite meeting expectations, the stock was down 4% on Friday, as the company reported weakness in Europe and its industrial divisions and said it expects that weakness to continue.

The second biggest mover down was Hewlett-Packard, whose shares finished the week down 6.41%. The stock was down last week, as research from IDC showed worldwide PC shipments dropped 14%, and it continued its decline this week as technology stocks sold off because of worse-than-expected earnings at Intel, IBM, and Apple supplier Cirrus Logic.