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 on 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 35 years, it has matched the long-term average of the stock market at 11% annually, even after last year's whack job. (Through 2007, it had been doing about 13% annually, which is ahead of the market's long-term average return.)

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 investor-intelligence ratings, I thought maybe Motley Fool CAPS might be an interesting addition to the strategy. More than 125,000 professional and novice analysts have rated about 5,400 stocks, with the best stocks earning five stars.

For the past two years, I've been tracking how using a CAPS strategy on top of the Foolish Four might hold some pleasant surprises for us. The first year saw the CAPS Dogs strategy not only outperform the original Dow Dogs theory, but also the Foolish Four, the S&P 500, and the Dow 30.

So last year I updated our list and tracked the performance. Here's the 2008 list of CAPS Dogs and their returns.

^ Excludes dividends, commissions, and taxes.
Altria's 2007 price is adjusted to reflect the Philip Morris International spinoff.

As you can see, the CAPS Dogs beat everyone handily except the DJIA, which managed to squeak ahead. While on an absolute basis the returns were a clunker, relative to any of the other strategies, the top CAPS stocks were pretty much the clear winner.

Which companies are the ones we'll be tracking in 2009? Here are the Dogs of the Dow for this year.

Source: Yahoo! Finance and CAPS.
^ Qualifies for Foolish Four.

What's it all about, Wolfie?
Because all but JPMorgan Chase rank three stars or better, all but that one will be included in our list. Although, if I were running this in my own portfolio, I'd probably just look at the top-rated, four-star stocks that fit the criteria.

I'd be remiss though 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.

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

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.