Keeping things simple worked in 2011.
The "Dogs of the Dow" strategy delivered a 12.2% gain in 2011. After adjusting for dividends, the strategy delivered returned 17.2%, compared with a 1.7% loss for the non–Dog stocks and a 4.6% increase for all Dow Jones Industrial Average (DJIA) components. Meanwhile, the S&P 500 ended 2011 virtually unchanged from where it closed in 2010.
The Dogs is one of the simplest investment strategies around. At the start of the year, investors purchase an equal-weighted basket of the 10 highest yielding DJIA stocks. The basket is rebalanced at the beginning of each year with the new set of high yielders. For the second year in a row, the Dogs outperformed both the DJIA and S&P 500. The 2010 Dogs had a total return of nearly 21%, compared with a 14% total return for the entire DJIA. 2010 was the first year since 2006 that the total return of the Dogs has surpassed that of the DJIA. The Dogs strategy performed well in the last bear market, outperforming during 2000 to 2003, when the market was dealing with the aftermath of the bursting of the tech bubble.
The worst stretch of performance for the Dogs was from 2004 to 2009, in which it the strategy outperformed just once in 2006. In 2007, the Dogs portfolio included two banks, Citigroup (C) and JP Morgan (JPM), plus two manufacturers that had grown heavily dependent on making loans, General Motors (GM) and General Electric (GE). The financial crisis during 2008 and 2009 was a crappy period for the Dogs strategy.
According to some market watchers, a successful Dogs strategy requires investors to take advantage of the January effect. Historically, the Dogs have outperformed the boarder DJIA by more than 1.5% in the month of January alone. While some market know-it-alls discount the Dogs strategy as a complete myth, there is no discounting the fact that this strategy is widely followed. In an age where investment products and strategies have become more complex than ever before, is it surprising that many investors are opting for strategies that are more simple? For 2012, the yield cutoff was 3.10%. The 2012 Dog of the Dow are (listed by yield as of December 30, 2011): AT&T (T) – 5.82%, Verizon Communications (VZ) – 4.99%, Merck & Company (MRK) – 4.46%. Pfizer (PFE) – 4.07%, General Electric (GE) – 3.80%, DuPont (DD) – 3.58%, Johnson & Johnson (JNJ) – 3.48%, Intel (INTC) – 3.46%, Procter & Gamble (PG) – 3.15% and Kraft Foods (KFT) – 3.10%.
Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.
For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx