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The 2014 Dogs of the Dow

By Dan Dzombak - Jan 2, 2014 at 3:34PM

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The 2013 Dogs of the Dow beat the market by 8.4%. Will their 2014 counterparts do the same?

The Dogs of the Dow is one of the simplest strategies to beat the market. In 2013, it beat the Dow Jones Industrial Average (^DJI 1.27%) by 8.4% for a total return of 35%. Read on to find the names of 2014's Dogs of the Dow.

The strategy
Dogs of the Dow is an investing strategy that buys and holds equal dollar amounts of the 10 highest-yielding dividend stocks of the Dow Jones Industrial Average. The strategy banks on the idea that blue-chip stocks with high yields are near the bottom of their business cycles and should do much better going forward. Investors in the strategy would then get not only large dividends, but also gains in the stocks underlying those dividends.

High-yield dividends
High-yield portfolios are often dismissed as inferior to their growth counterparts. Many people fear that increasing dividend yields mean lower portfolio returns. Others think dividend payments mean management believes the business is done growing.

Evidence compiled by Tweedy, Browne refutes these beliefs. Research shows that portfolios of high-yield dividend stocks outperform lower-yielding portfolios and the market in general. In fact, a study by Wharton finance professor Jeremy Siegel found that over 45 years, the highest-yielding 20% of S&P 500 stocks outperformed the S&P 500 by three times! The highest-yielding stocks turned a $1,000 investment in 1957 into $462,750 by 2002, compared with a final balance of $130,768 if the same money was invested in the index.

Performance
After beating the Dow by 6.8% in 2011, the Dogs of the Dow underperformed by 0.2% in 2012 but came roaring back with 8.37% outperformance in 2013. The Dogs of the Dow's 34.87% return even bested the S&P 500's (INDEX: ^GSPC) 30% return.

Check out the Dogs of the Dow performance in 2013:

Company

Initial Yield

Initial Price

2013 Performance

AT&T

5.34%

$33.71

9.74%

Verizon Communications

4.76%

$43.27

18.61%

Intel

4.36%

$20.62

30.86%

Merck

4.2%

$40.94

26.84%

Pfizer

3.83%

$25.08

26.21%

DuPont

3.82%

$44.98

49.15%

Hewlett-Packard

3.72%

$14.25

101.15%

General Electric

3.62%

$20.99

37.88%

McDonald's

3.49%

$88.21

13.59%

Johnson & Johnson

3.48%

$70.10

34.63%

Dow Jones Industrial Average

 

13,104

26.5%

Dogs of the Dow

   

34.87%

Dogs Return vs. Dow (percentage points)

   

+8.37%

 Source: S&P Capital IQ as of Jan 1, 2014.

So who are the 2014 Dogs of the Dow?

Company

Initial Yield

Initial Price

AT&T (T 1.27%)

 5.23%

$35.16

Verizon Communications (VZ 0.83%)

 4.31%

$49.14

Merck (MRK 2.35%)

 3.52%

$50.05

Intel (INTC 1.46%)

 3.47%

$25.96

Pfizer (NYSE: PFE)

 3.4%

$30.63

McDonald's (NYSE: MCD)

 3.34%

$97.03

Chevron (NYSE: CVX)

 3.2%

$124.91

General Electric (NYSE: GE)

 3.14%

$28.03

Cisco Systems (NASDAQ: CSCO)

 3.03%

$22.43

Microsoft (NASDAQ: MSFT)

 2.99%

$37.41

Dow Jones Industrial Average

 

16,576

Source: S&P Capital IQ as of Jan 1, 2014.

We'll have to wait and see whether the Dogs of the Dow will outperform in 2014.

Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,761.05 (1.27%) $424.38
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$91.02 (2.35%) $2.09
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$45.15 (0.83%) $0.37
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.27 (1.27%) $0.23
Intel Corporation Stock Quote
Intel Corporation
INTC
$36.11 (1.46%) $0.52

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

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