Everyone likes a simple investing strategy. When it comes to dividend investing, it doesn't get much simpler than the Dogs of the Dow.
So far this year, the Dogs of the Dow have been able to beat the performance of the Dow Jones Industrial Average
During big bull markets, most investors gravitate to growth stocks. But over the past several years, as the financial crisis brought about one of the worst bear markets in recent memory, investors have increasingly turned to stocks that pay healthy dividends as a safety play. You can't always count on dividend stocks to hold up during bad times, but historically, they've provided at least some ballast against big downward moves.
The Dogs of the Dow are all about dividend stocks. To use the strategy, take the Dow's 30 components and rank them by dividend yield. Look at the first 10 on the list, and invest equal amounts in each stock. That's it -- you're done.
Last year, the Dogs of the Dow crushed the overall average. This year, it's a much closer race.
It's a dog-eat-dog world
Fortunately, both the Dow Dogs and the overall Dow average are both posting strong gains this year. For the Dow, investors have enjoyed an 11% return, not including dividends at an annual yield of between 2.5% and 3%. The Dogs of the Dow, on the other hand, have returned almost 13% excluding dividends, and the payouts that investors have earned on those high-yielding stocks are higher than the overall Dow, at about 3.6% currently.
Two percentage points may not seem like much, and compared with some past years of outperformance for the Dogs of the Dow, it's not. But every percentage point counts, and over time, a couple percent can mean the difference between a secure retirement versus running out of money early.
Interestingly, though, all five of the top-performing Dogs of the Dow stocks came from the five highest-yielding stocks at the beginning of the year. AT&T
This dog's holding back the pack
In the bottom half of the Dow Dogs, the story isn't as pretty. Intel
Johnson & Johnson and Procter & Gamble
Run with the Dogs
The Dogs of the Dow strategy doesn't always work, but its simple approach in pointing you toward top-yielding blue-chips makes a lot of intuitive sense. To learn more about the current crop of Dow Dogs, consider accepting this invitation to look at The Motley Fool's latest premium reports. Click here to read more about Intel, or to read our report on General Electric, click here. You'll be glad you did.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter, @DanCaplinger. The Motley Fool owns shares of Intel and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Procter & Gamble, and Intel, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.