Dogs of the Dow:Mongrels or Man’s Best Friends?

Originally published on AOL Daily Finance For the rest of the story

The “Dogs of the Dow” theory involves buying equal amounts of the 10 Dow stocks that had the highest dividend-to-price ratio during the previous full year. It has become a popular investing strategy thanks to its simplicity, and for the first three months of 2014, the best of the Dogs have outperformed the S&P 500. But not everyone thinks it’s a Best of Breed technique.

Drawbacks Among the Mangy Curs

First, let’s clarify this strategy. Plenty of stocks pay dividends — money you get just for owning them on payout days. If the dividend amounts to a relatively high percentage of the stock price, that’s an indicator that the shares may be undervalued — and thus poised to rise.

This year, the 10 are AT&T (T), Chevron (CVX), Cisco Systems (CSCO), General Electric (GE), Intel (INTC), McDonald’s (MCD), Merck (MRK), Microsoft (MSFT), Pfizer (PFE) and Verizon (VZ).

Telecom stocks like AT&T and Verizon tend to show up in the Doghouse year after year mainly because they are traditional high-yielding “widows and orphans” stocks with dividend yields of 5.25 percent and 4.46 percent, respectively.

People expect the Dogs to outperform the overall market. Some years — like last year — they do. However, the 2013 group results were skewed by the performance of one stock, Hewlett Packard (HPQ), which doubled. Most of the other Dog stocks were down on the year or had single-digit percentage rises. In 2012, some of the Dogs jumped through their hoops like champions, but among the other 20 Dow components were stocks like Bank of America (BAC) and Home Depot (HD), which soared too. Originally published on AOL Daily Finance For the rest of the story


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