For the past five years I've been tracking how using a CAPS strategy on top of a Foolish twist to a popular Dow gambit would pan out.
Most investors have probably heard of the Dogs of the Dow strategy. Rank the dividend-yielding stocks of the Dow Jones Industrial Average 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 put a twist on that 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 the Dogs of the Dow has a pretty impressive record, with annualized gains of 17.7%.
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. But I thought adding the opinions of the best and brightest investors on Motley Fool CAPS might be an interesting addition to the strategy. More than 180,000 professional and novice analysts have rated more than 5,400 stocks, with the best of them earning five stars. Buying only those Foolish Four stocks that earned a three-star rating or better on CAPS might just give us outsized performance.
So how did our doggies do? Over the past five years, CAPS Dogs have handily outpaced the returns of any of the other strategies employed.
|
Strategy |
2007 |
2008 |
2009 |
2010 |
2011 |
5-Year Avg. |
|---|---|---|---|---|---|---|
| CAPS Dogs | 7.95% | (22.09%) | 11.56% | 9.55% | 15.19% | 4.43% |
| Dogs of the Dow | (1.40%) | (41.30%) | 12.90% | 15.50% | 12.28% | (0.40%) |
| Foolish Four | 3.60% | (50.20%) | 13.86% | 9.55% | 15.19% | (1.60%) |
| Dow 30 | 6.80% | (33.80%) | 18.82% | 11.02% | 5.53% | 1.67% |
| S&P 500 | 3.50% | (38.50%) | 23.45% | 12.78% | 0.00% | 0.25% |
Even during the depths of the Great Recession, when all the strategies lost money, our CAPS Dogs did better, losing less than any of them. Over the past two years, the Foolish Four and our CAPS Dogs have matched returns because all the stocks were highly rated and so none were excluded.
Which companies are the ones we'll be tracking in 2012? Here are the Dogs of the Dow for this year.
|
Company |
CAPS Rating |
Yield |
Price 12/31/2011 |
|---|---|---|---|
| AT&T (NYSE: T) | *** | 5.82% | $30.24+ |
| Verizon (NYSE: VZ) | **** | 4.99% | $40.12 |
| Merck | **** | 4.46% | $37.70 |
| General Electric (NYSE: GE) | **** | 3.80% | $17.91+ |
| Pfizer (NYSE: PFE) | **** | 3.70% | $21.64+ |
| DuPont | **** | 3.58% | $45.78 |
| Johnson & Johnson | ***** | 3.48% | $65.58 |
| Intel (Nasdaq: INTC) | ***** | 3.46% | $24.25+ |
| Procter & Gamble | ***** | 3.15% | $66.71 |
| Kraft | **** | 3.10% | $37.36 |
Qualifies for Foolish Four.
Our CAPS Dogs and the Foolish Four -- GE, Pfizer, Intel, and AT&T -- will mirror each other again this year as the CAPS community also finds these companies to be among the best. Perhaps it's not so surprising that in these troubled times investors will fly to the biggest, most stable companies.
What's it all about, Wolfie?
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 dog in the race, check out the special new report from The Motley Fool in which our analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- get instant access now!
