Investing Ideas 2014: Go With the Dogs of the Dow?

This December, everyone seems to be looking for investing ideas for 2014 -- that magic combination of stocks that will help them beat the market. One popular strategy will offer up 10 blue-chip stocks with excellent dividend yields. I'll reveal those 10 stocks at the end, but first, let me tell you where these 10 stocks come from.

Back in 1991, Michael O'Higgins was in his 13th year of running his O'Higgins Asset Management when he published a book that got millions of casual investors interested in the stock market. O'Higgins claimed that by investing in the 10 highest-yielding stocks in the Dow Jones Industrial Average at the beginning of every year, one could outperform the market.

Because the Dow represents stocks of solid, well-entrenched companies, the highest-yielding stocks are usually the ones that have fallen on hard times or are at the bottom of a business cycle. By buying these stocks -- the theory goes -- investors are getting bigger dividend payouts and investing in companies that will soon be on the upswing.

The theory was back-tested all the way back to 1929. If someone had invested $1 in the "Dogs of the Dow" back then, they would now be sitting on $9,451 -- not including commissions and taxes. That's a whopping 600% more than if the money were simply invested in the S&P 500. 

Taking a closer look at recent history
But while back-testing is nice, it proves a lot more if the theory actually proves out after it is stated. To get an idea of the effectiveness of this strategy, look at how continual use of the "Dogs" strategy, starting in 1996, would have performed versus an investment in the S&P 500.

Sources: Dogsofthedow.com, YCharts, www.multpl.com. Includes dividends; does not include commissions or taxes.

As you can see, this strategy didn't work very well during the dot-com era, as much of the money being made was in new technology start-ups instead of blue chip stocks. But over time, the bubble hasn't burst nearly as hard using the "Dogs" strategy.

If you invested $1,000 in 1996 using the Dogs strategy, you would currently have $4,536; over the same timeline, an investment in the S&P 500 would have left you with $3,490.

On the whole, we Fools prefer a buy-to-hold strategy which focuses on the underlying fundamentals of individual companies, rather than rebalancing every year. It should also be noted that taxes and commissions could have taken a significant bite out of the Dogs' performance, depending on the type of account the money was being held in.

That being said, we are a motley bunch, and recent history shows that this strategy works.

The 10 Investing Ideas for 2014
Now, the year isn't quite over yet, so this list could change. But if 2013 were to end today, here is the list of stocks you'd need to buy to follow the Dogs of the Dow strategy.

Sources: Yahoo! Finance.

Some of these companies are perennially on the list of Dow Dogs. AT&T and Verizon have been on the list every year for the past nine years -- and they have been the two highest-yielding stocks for the past five.

This is largely because each company produces tons of free cash flow -- usually via telecom subscriptions -- to pay out dividends. At the same time, some investors shy away from these companies because they have to spend enormous amounts of money to build out infrastructure, and if the telecom business encounters a disruptive innovator, all of that spending will be for nothing.

Others are on the list because investors aren't willing to pay a premium for what they see as businesses with shrinking growth prospects. For example, investors have been worried for quite some time that Intel's inability to jump into the mobile game from the beginning has irreparably hurt the company's potential.

Cisco, on the other hand, just came out with earnings that warned of slowing business. This spooked investors, and the stock has fallen 20% since August -- which also means the yield has risen from 2.6% to today's 3.2%.