Are These Dog Stocks For You?
Once a year I write about the “Dogs of the Dow” investment strategy. It’s a simple technique popularized a few years ago by book called Beating the Dow. It was originally published in 1991 and seems to have taken on a life of its own.
The book describes a simple strategy.
Just buy the ten Dow stocks with the highest yields. Rebalance the portfolio every January and you’ll laugh all the way to the bank.
According to the data, the Dogs of the Dow outperformed not only the Dow Jones Industrial Average, but the S&P 500 as well. But that was then… and this is now!
What a simple and easy way to profit.
Every year the strategy crops up again. Just the other day I read yet another article about the top Dogs of the Dow stocks for 2010. I see a few problems with the strategy, but I guess the publisher keeps printing the book.
The problem is simple… The strategy doesn’t work.
In 2008, I warned everyone to stay away from this investment strategy… and those who listened saved themselves huge money!
In 2009, I told everyone to stay away once again.
The 2009 results were slightly different. Seven of the ten Dogs of the Dow stocks ended the year higher than they started. Does that mean we should rush out and follow the strategy in 2010?
I say no. The gains seen by the various companies in 2009 weren’t earth shattering. As a matter of fact, General Electric (GE), AT&T (T) and Verizon (VZ) all posted losses.
The total return from the Dogs of the Dow was 12.9% for the year.
The Dow itself returned 18.8%.
This year the Dogs of the Dow strategy includes an entirely new group of companies… Leading the list is AT&T with a yield of 5.8%.
Verizon, DuPont (DD), Kraft (KFT) and Merck (MRK) round out the top five. Their dividend yields range from 4.1% to 5.7%.
The rest of the group is Chevron (CVX), McDonalds (MCD), Pfizer (PFE), Home Depot (HD) and Boeing (BA). Their yields range from 3.1% to 3.5%.
These are all large and well respected companies. You shouldn’t be ashamed of holding any of these stocks in your portfolio. However, using the group as a viable investment strategy just isn’t a smart thing to do.
For example, I happen to think a few of these stocks will outperform the others in the next few months and years…
Take Pfizer who is focused on the healthcare industry. Once all this crazy government intervention gets sorted out, they are sure to thrive.
Another company I like is Home Depot. Despite the housing crisis, this company is smelling like a rose. I see sales activity in the housing market moving higher in the next few months and that’s sure to cause sales activity to jump in Home Depot as well.
You couldn’t pay me to own either Boeing or AT&T.
Boeing is selling products made out of expensive commodities (like aluminum)… this exposes them to cost over-runs. And their customers are in one of the most regulated – and least profitable – industries in the world. If you think it’s going to get easier to fly… or make money flying, you’re crazy.
It’s a recipe for disaster.
And AT&T is no better. Their landline service is going the way of the buggy whip. And the wireless service is getting their lunch eaten by the competition… it won’t be long before they start asking for a government bailout.
In my mind, the Dogs of the Dow strategy is pure bunk.
You’d be better off looking at the companies you’re investing in and cherry picking the best and the brightest. You can capture big growth and big dividends… and nothing is better than that!
Category: Stocks
