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Saturday, December 22, 2012

Revisiting the “Dogs of the Dow”


Revisiting the “Dogs of the Dow” Strategy for 2013

Investing isn’t supposed to be easy.
Or at least not as easy as, say, buying an equal amount in each of the Dow’s 10 highest-yielding stocks on January 1… waiting 366 days… and then replacing that basket of stocks with the new set of highest yielders.
But, as it turns out, this simple strategy – known as the “Dogs of the Dow” – delivered impressive results in 2010 and 2011.
So impressive, in fact, that at the beginning of this year I took the time to evaluate the fundamentals for each of the 2012 Dogs to try and predict if the strategy would deliver solid results yet again.
My conclusion? They would.
So was I right?
With only a few weeks left in the year, let’s take the time today to find out. In the process, I’ll also share how you can check the performance any time you’re curious. Then we’ll take a look at the crop of Dow laggards contending for the opportunity to join the Dogs of 2013.
Simple and Beloved
Money manager Michael O’Higgins deserves credit for popularizing the Dogs of the Dow strategy in his bestselling book, Beating the Dow. And the famed Wharton Professor, Jeremy Siegel, added to the enthusiasm when he featured the strategy in his book, Stocks for the Long Run.
I can’t really say I blame investors for latching onto the strategy, either. Consider:
  • It’s easy to implement and manage. Even a caveman can handle buying and selling stocks once every 366 days.
  • It’s tax efficient. The strategy forces investors to hold stocks long enough to benefit from long-term capital gains tax rates. That’s no small feat, considering that nowadays, the average investor only holds a stock for about five months.
  • It’s a conservative, income-oriented strategy by design. After all, it involves buying out-of-favor stocks (i.e. – value stocks) with above-average yields. And throngs of retirees and almost-retirees want conservative income.
  • It works. Although past performance does not guarantee future results, we can’t ignore the track record. The Dogs outperformed the Dow and the S&P 500 in every decade except the 1930s and 1990s.
And lo and behold, it’s working again in 2012.
So far this year, the Dogs of the Dow are up 11.2% (including dividends), compared to a 10.7% return for the overall Dow.
Granted, the outperformance isn’t as strong as it was in past years. Take 2011, for example, when the Dogs rose 16.7% (including dividends), compared to an 8.4% rise for all 30 stocks in the Dow.
Still, there’s something to be said about earning this year’s returns with such a simple strategy.
If you ever want to check out the performance on your own, you can easily find the total return for the Dogs of the Dow and then compare it to the Dow’s.
The Perfect Dividend Strategy for 2013?
If dividend tax rates do spike higher in 2013, the Dogs of the Dow might be the perfect strategy to employ in an IRA account.
With that in mind, here’s a list of the companies that would make the list if the year ended today.
  • AT&T (T)
  • Verizon (VZ)
  • Intel (INTC)
  • DuPont (DD)
  • Merck (MRK)I
  • Hewlett-Packard (HPQ)
  • McDonald’s (MCD)
  • Microsoft (MSFT)
  • Johnson & Johnson (JNJ)
  • Pfizer (PFE)
Purists will argue that we need to wait until the last trading day of the year to compile the roster. But it’s unlikely to change very much. So it can’t hurt toget started doing our research, even if one or two companies drop out of the list.
Remember, the Dogs of the Dow are comprised of the highest-yielding stocks. But they likely earned this distinction because of poor stock price performance, not aggressive dividend hikes.
Case in point: Hewlett-Packard. Although the company raised its dividend by about 10%, it’s near the top of the list because share prices collapsed by about 50%.
And putting our hard-earned capital on the line based on dividend yield alone is a surefire way to get snared in the dividend yield trap.
Bottom line: Based on three consecutive years of solid performance, countless investors are bound to become devout followers of the Dogs of the Dow strategy in 2013. But please don’t be so naïve or lazy.
If we’re going to embrace the strategy in 2013, we need to do some more homework first. Specifically, we need to evaluate the Dogs based on multiple fundamental metrics, instead of just one. And I’ll do just that for you in a future column. So stay tuned.


Artificial Heart Provides An Extra 300 Years of Life

Arizona-based SynCardia Systems is making life easier (and longer) for patients waiting for a heart transplant.
The company manufactures an artificial heart that replaces the organ’s two lower chambers that pump blood through the body. And it can keep patients alive longer while they wait for a donor heart to become available.
It’s portable, too. So patients can go home instead of staying at the hospital the whole time.
One New York City resident, Daquain Jenkins, was recently implanted with the technology. He received a real donor heart in August. But when it failed, doctors removed the heart and replaced it with SynCardia’s plastic alternative.
Dr. Anelechi Anyanwu, who performed Jenkins’ operation, says that while the technology is certainly adequate, the company understands that there’s a lot of room for improvement…
“In a way, it’s just a crude mechanical pump that just moves blood in one direction, and that’s where we are now,” he says. “But there are several developments going on, for example – to make smaller pumps, to have better power supplies and ultimately to have a pump [where] the whole mechanism is within the body.”
So it might not be the most sophisticated technology at this time. But even with the current version, the company has provided patients with 300 years of extra life so far.
And as the technology becomes more advanced, some heart surgeons believe that a permanent artificial heart may soon be an option for some patients.

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