Dogs of the CAPS

I like dogs. They're loyal and friendly. And when it comes to investing, they can indeed be your best friend.

Most investors have probably heard of the Dogs of the Dow strategy. Rank the dividend-yielding stocks from highest to lowest yield and buy the top 10. Hold for one year and a day and sell. Then do it all over again. Wash. Rinse. Repeat.

Four dog night
The Motley Fool even used to follow a strategy called the Foolish Four, which built upon the original strategy by ranking those high-yielders by price -- lowest to highest -- and buying just four of the top five stocks (if the cheapest stock is also the highest yielder, throw it out, because it's probably a real dog). While the Fool abandoned the strategy because of doubts about its efficacy, some sites still track results, and over 25 years it has a pretty impressive record, with annualized gains of 17.7%.

Like I said, I like dogs. The Foolish Four was my first foray into investing in individual stocks, so I've always carried a warm spot for it in my heart. With the Fool's own foray into its newest investor intelligence ratings, I thought maybe Motley Fool CAPS might be an interesting addition to the strategy. More than 79,000 professional and novice analysts have rated more than 5,300 stocks, with the best earning five stars.

Last year I postulated that using a CAPS strategy on top of the Foolish Four might hold some surprises for us. So how did our doggies do? Here's the list of 2007's Dow dogs and their returns.

The Foolish Four strategy would have had us drop Pfizer from that list, which, as it turns out, would have been a good call. By dropping Verizon and GM because of their less-than-average CAPS ratings last year, we would have missed a good performer in Verizon, but been spared what turned out to be a bad performer in GM, even though it had been riding pretty high for most of the year.

But notice how well the CAPS Dogs did! However, I would never recommend having just two stocks as the whole of a portfolio, and just one year's worth of data is not significant enough to put our trust in it. But, as part of a well-diversified portfolio of stocks, it might be fun to include the CAPS Dogs.

So which companies are the ones we'll be tracking in 2008? Here are the Dogs of the Dow for this year.

We see the CAPS community especially likes four of them, while Pfizer has moved up from last year to a "stock of interest" with a three-star rating. DuPont will round out our "portfolio" of CAPS Dogs, as it also has a three-star rating.

What's it all about, Wolfie?
I'd be remiss if I didn't mention that I no longer invest using mechanical investing strategies like the Dogs of the Dow or the Foolish Four, but I do keep an eye on how they perform, just for nostalgia.

As smart as our Foolish investors are, this is a contrarian investing strategy that tries to stand market wisdom on its head. I'll keep you posted on how our CAPS Dogs are running.

If you want to get your own CAPS dog in the race, just click here to get started. It's 100% free.