The Motley Fool Previous Page

3 Dogs of the Dow to Buy Now

Doug Ehrman
December 31, 2012

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 (DJINDICES: ^DJI) 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 (NYSE: T): 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 (NASDAQ: AAPL) 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 (NYSE: VZ): 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 suc