Since ’09, Dow ‘Dogs’ have led the pack

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Updated: February 10, 2012 8:37AM

An old-school investment strategy had a banner year in 2011 and has a two-year winning streak.

It doesn’t get a lot of attention, however, because it’s so simple and no brokerage will make any money on trading commissions for those who adopt it.

It’s the Dogs of the Dow strategy. It calls for buying in equal proportions the 10 stocks in the Dow Jones industrial average with the highest dividend yields. For comparison’s sake, I’m assuming that at the start of the year you buy the highest yielding stocks from the close of the prior year.

Stocks that pay fairly large dividends compared with their stock prices have a whiff of risk about them. Investors have had some reason to beat down the share prices, yet the companies have confidence in themselves to keep up the payments. And as members of the Dow index, these “dogs” are blue-chip royalty.

In 2011, the Dogs of the Dow gained 12.2 percent vs. 5.5 percent for the overall Dow index. The result also was well ahead of any other broad-based index. The Dogs outperformed the Dow in 2010 as well, 15.5 percent to 11 percent.

Analysts who have run the numbers going back to the 1920s have found that the Dogs often beat the main index when the performance is measured by decades. It lagged the main Dow in the 1930s, 1990s and 2000s, despite the recent performance, said Bespoke Investment Group.

The Dogs appear to pound the Dow in years of lower volatility and when the main index doesn’t produce sudden gains. If you think the Dow has a huge rally in it this year, file this idea away for later.

But if you aren’t that gung-ho, remember that the dividends are among the main selling points for the Dog stocks. This year, this fiscal fraternity is generating dividends of from 3 percent to nearly 6 percent, not bad compared with bank CDs.

This year’s Dogs of the Dow, based on the dividend yields at the close of 2011, are: AT&T (T), Verizon (VZ), Merck (MRK), General Electric (GE), Pfizer (PFE), DuPont (DD), Johnson & Johnson (JNJ), Intel (INTC), Procter & Gamble (PG) and Kraft (KFT).

CROP DUSTUP: Last year was turbulent in the corn market. Futures hit $8 a bushel in the spring on hot weather that affected planting, then fell as much as $2 later in the year on a large harvest.

This year promises volatility, too. The Wall Street Journal said production of corn seed is down 25 percent to 50 percent, which could mean farmers will plant less acreage.

Analysts at Merrill Lynch predict higher corn prices for 2012 based on a combination of strong demand, lower yields and lower stocks. They said they believe fears about the economy will subside, allowing the market to focus more on tight supplies.

They also see higher prices for soybeans but not for wheat.

VOLUME CHILL: Record years for trading volume are by now ho-hum announcements for CME Group (CME), the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade. Indeed, CME’s markets, which include the New York Merc, hit another annual record in 2011 with average daily volume of 13.4 million contracts a day. That’s up 10 percent from 2011.

But volume tailed off in December, when it was down 9 percent from the same month in 2010. It’s tempting for CME critics to blame that on the bankruptcy of MF Global and its estimated $1.2 billion in missing money from customers. Many believe the collapse exposed flaws in the self-regulatory market model that the CME represents.

Other factors may be more significant, however. CME said the December decline was led by a 30 percent drop for its interest rate products, which include futures on U.S. Treasuries.

Analysts said interest-rate trading dived because the European crisis ended guessing that the Federal Reserve will raise rates. And the Fed said it will begin publishing interest-rate forecasts. It’s taking some of the speculation out of that market.

As Raymond James analyst Patrick O’Shaughnessy told Reuters, “Hedging is meant to decrease uncertainty, and if someone else does it for you, the less need there is to hedge using futures.”

Between MF Global and the Fed, there’s pressure ahead on CME earnings.

AUTO ZONE: Automakers’ sales growth for 2011 prompted analysts at Robert W. Baird & Co. to summarize their top picks among stocks for industry suppliers. Analysts David Leiker and Joseph Vruwink said the supplier stocks faltered in 2011 “in stark contrast to market and earnings growth throughout the year.”

So 2012 could be catch-up time. The Baird analysts have “outperform” ratings on Autoliv (ALV), Delphi Automotive (DLPH), Gentex (GNTX), Johnson Controls (JCI), Methode Electronics (MEI) and Tower International (TOWR).

CLOSING QUOTE: “The census reported an increase of more than one million households from 2010 to 2011, and if that continues, the U.S. will finally begin working through its excess housing inventory. Enough new households will ultimately create sufficient demand to bring back the construction industry, even if it won’t bring back boom-level prices.” — Edward Glaeser, Harvard economics professor, writing for Bloomberg.