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Can the Dow Dogs Save You From a Crash?

By Dan Caplinger - Nov 16, 2012 at 2:30PM

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A quick look at how the Dow's top dividend-payers have fared this month.

Investors who follow the Dow Jones Industrials ( ^DJI -0.17% ) tend to like the big, well-known companies among its 30 component stocks. By focusing on the cream of the crop among U.S. stocks, investors hope to avoid some of the larger swings that smaller, more obscure companies often face.

But many investors look to reduce their risk even further by using dividend stocks. One popular technique that many Dow investors use is the Dogs of the Dow strategy, in which you find the top yielding stocks in the Dow at the beginning of the year, buy them, and then hold them throughout the year. There's no question the Dogs of the Dow pay better dividends than the overall Dow, but how do the Dow Dogs fare during downturns? Let's look at the price action so far in November to get some clues.

Mixed success
Among this year's Dow Dogs are a number of defensive names that have indeed held up reasonably well during this month's market swoon. Johnson & Johnson ( JNJ 1.46% ), for instance, with its yield of about 3.5%, has posted only modest losses so far this month.

But some of the best-known Dow Dogs haven't fared as well, largely because of extraordinary factors. For instance, AT&T ( T 1.78% ) and Verizon ( VZ 1.36% ) have the top yields among Dow stocks, and the nature of their businesses usually makes them a bit less vulnerable to downturns than stocks that don't sell basic services. But with damage from Hurricane Sandy hitting both carriers, and especially Verizon, they've seen share declines that were worse than normal.

Moreover, those extraordinary factors have pushed up some non-Dog stocks as well. Home Depot ( HD 0.01% ) in particular has managed a slight gain for the month, with investors looking for a big boost from Sandy-related rebuilding efforts.

Feeling dogged
Just because the Dow Dogs haven't all risen in the face of November's declines doesn't mean you should conclude that they'll never protect you from a crash. The nature of this particular drop is unusual because of its ties to Election Day and a natural disaster. In general, though, dividend stocks often provide better risk-adjusted returns over the long haul, and that can be valuable both for Dow Dogs investors and for everyone else.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,580.08 (-0.17%) $-59.71
AT&T Inc. Stock Quote
AT&T Inc.
T
$23.46 (1.78%) $0.41
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$159.38 (1.46%) $2.29
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$51.42 (1.36%) $0.69
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$407.81 (0.01%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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