10 Dow Dogs Bark For 2012

As we look at stock portfolios with a slant towards dividends, we have to look at one of the most widely circulated strategy-- the "Dogs of the Dow. The simple and easy to operate approach is: Buy the 10 highest-yielding Dow stocks at the start of each year, and hold on.

This approach hasn't always beaten the market but in these days where there is increased value in dividends for income and having large stocks should mitigate against some of the market volatility, it is definitely worth considering.

According to Jonas Elmerraji of The Street.com

"The Dogs of the Dow returned 20.5% in 2010 and 16.3% in 2011, dramatically outperforming the broad market both years."

Company

Yield

AT&T (T)

5.5%

Verizon's (VZ)

5.09%

Merck (MRK)

4.35%

Pfizer (PFE)

3.97%

Johnson & Johnson (JNJ)

3.5%

General Electric (GE)

3.4%

Procter & Gable (PG)

3.11%

DuPont (DD)

3.1% .

Chevron (CVX)

3.03%

Kraft (KFT)

3%

This appears to me to be a balanced list of companies. I could argue that having two telecom companies, two pharma companies and two "bathroom product" companies is slightly less than desirable but we are following the approach of selecting the top dividend producers. It is very unlikely that any of these companies are boosting dividends to prop up a sagging company so there is little worry there.

I own Chevron but have chosen 3M over Dupont and Vodaphone for telecoms company. I also have McDonald's rather than Kraft. This is certainly a good starting point for somebody wanting to create a dividend bearing portfolio with stability and some growth prospects.

This is worth comparing against our dividend producing ETF portfolio:

Asset Fund in this portfolio REAL ESTATE (ICF) iShares Cohen & Steers Realty Majors CASH CASH FIXED INCOME (TIP) iShares Barclays TIPS Bond Emerging Market (VWO) Vanguard Emerging Markets Stock ETF US EQUITY (DVY) iShares Dow Jones Select Dividend Index US EQUITY (VIG) Vanguard Dividend Appreciation ETF INTERNATIONAL EQUITY (IDV) iShares Dow Jones Intl Select Div Idx High Yield Bond (HYG) iShares iBoxx $ High Yield Corporate Bd INTERNATIONAL BONDS (EMB) iShares JPMorgan USD Emerg Markets Bond 2012 Dow Dogs -- Total of $10K invested equally in each stock The Safest and Best Dividends on the Dow-- Total of $10K invested equally in each stock Five Stocks for the Timid Investor-- Total of $10K invested equally in each stock 3 All Star Stocks-- Total of $10K invested equally in each stock Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)

Portfolio Performance Comparison

Portfolio/Fund Name YTD
Return 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Retirement Income ETFs Tactical Asset Allocation Moderate -2% -3% -23% 9% 74% 7% 55% 2012 Dow Dogs 0% 4% 23% 17% 105% 4% 13% Retirement Income ETFs Strategic Asset Allocation Moderate 2% -2% -6% 14% 105% 2% 8%

This selection performs decently. Note that this is not a true reflection of the Dogs strategy as the historical simulation takes these ten stocks back ten years. It hasn't swapped the top performers in and out. That is deliberate so that we can see how this set has performed. They have performed reasonably well and when you add dividend income, this is worth consideration.

Three Month Chart

One Year Chart

Three Year Chart

Five Year Chart

As I look over the longer term, I note that this particular set of stocks has tracked the dividend ETF portfolio with the buy and hold strategy fairly closely. It has increased more strongly as the focus on dividend stocks has increased and I think the strong yields will also help support stronger growth in the stocks.

This is worth considering and comparing with what you have today.

Disclosure: I am long CVX, MCD, MMM, VOD.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.